IMF: De-escalation of Greece’s debt – “Explosive” dynamics in US and Chinese deficits

The latest report of the International Monetary Fund (crisis monitor) records worrying developments and prospects for global public debt, noting that they will have a wider impact on the course of the economy.

The jump in public debt in 2020 due to the massive support measures adopted internationally was followed by a gradual reduction in the following two years, which however was stopped in 2023 and it is uncertain whether it will continue in 2024 when elections are held in dozens of countries that have a total of more than 50 % of world population. After all, past experience shows that the deficit is larger by 0.4 percentage points in pre-election years, as reported by the IMF.

The deficit is expected to be formed to 4.9% of global GDP this year and the fiscal adjustment in the following years to be limited, so that in 2029 it amounts to 4.3% or about 0.7 percentage points higher than in 2019.

The consequence of this slow adjustment will be to continue to increase public debt, which will approach 100% of GDP in 2029 from 93% in 2023, when it was already 9 percentage points higher than the pre-pandemic level.

The opposition to fiscal adjustment in 2023 reflects it slow withdrawal of support measures for the energy crisis and the industrial policy incentives – subsidies and tax breaks – followed by large countries and mainly the USA and the China. It is also characteristic that the dance of the increase in global debt is being dragged by these two largest economies in the world, which also create great risks for other countries.

In the US, public debt rose last year to 122.1% of GDP from 120% in 2022 as the budget deficit more than doubled to 8.8% from 4.1% over the same period, although economic growth was above 2% . With the deficit projected – unless fiscal policy in America changes – to remain above 6% in the medium term, US debt is expected to reach 133.9% of GDP.

Making a comparison, we can say that while tGreece’s public debt is projected, according to the IMF, to decrease by 30 percentage points by 2029 at 138.8% of GDP, US debt is expected to rise to close to that level this year and, without drastic measures, will almost double by 2053.

This explosive prospect is another thing that has led analysts to doubt it whether the US will be able to continuously increase its debt or whether it will eventually become unsustainable and the investors – largely foreign – who finance the country’s deficits will refuse to continue doing so, leading to a crisis in its economy.

For China’s debt, although it is lower than that of the US, its momentum is also explosive, as it rose to 83.6% of GDP last year from 77.1% in 2022 and is expected to reach 110.1% in 2029 .

But why might the rising debt dynamics of America and China negatively affect other countries? The IMF mentions two ways in which there will be a negative impact. In the case of the US, high deficits and debt are driving up yields on its government bonds, which last October climbed to 5% on the 10-year note before retreating, but are still hovering above 4.5% today. Given the huge size of the US bond market, pressures will also be exerted on third country bonds. In the Eurozone, for example, bond yields are lower than those in the US, but they follow the fluctuation of American ones.

In China, a slowdown in its growth rate would affect global trade and global growth, particularly for countries with strong trade and investment linkages with it.

With information from APE