Global Sovereign Debt to Reach $44 Trillion

Worldwide sovereign debt is set to reach a new record high of $44 trillion this year despite a slight reduction in governments’ annual borrowing, an estimate from credit ratings agency S&P Global said late Friday.

The firm calculated that this year’s sovereign borrowing was likely to be $6.8 trillion, down around 4% or $315 billion on 2016’s amount and to 9% of global gross domestic product, Reuters reported.

Absolute debt levels will continue to increase however. S&P projects almost $1 trillion rise to $44.3 trillion, up 2.3% at projected market exchange rates.

The US at $2.2 trillion and Japan at over $1.8 trillion will again be the most prolific borrowers this year, accounting for 60% of the total, followed by China, Italy and France.

Moritz Kraemer, S&P’s chief sovereign analyst, said that using the idea of a calendar gave a perspective of the huge scale of US borrowing. If it were distributed evenly across the year, US issuance “would have already covered Switzerland’s 2017 borrowing needs at lunchtime on Jan. 1; Brazil’s on Jan. 30 and Italy’s on Feb. 17,” Kraemer said. With the exception of Japan, it would then have passed China’s and also the rest of the world’s by Feb. 28.

Britain’s post-Brexit double downgrade will mean the percentage of world debt now with a top grade “triple-A” rating will fall to an all-time low of just 7% down from around 13% a year ago.

S&P’s calculations also showed Japan faces by far the highest debt rollover ratio this year, reaching a sum equivalent to 66% or two-thirds of the size of its economy.

Japan had the highest debt levels in the world at 254% of GDP in 2016, followed by Greece and then Lebanon at 142%.

Looming Debt Bubble

Global debt-to-GDP is now at a comfortable record high and the Bank for International Settlements, aka the central bank of central banks, noted that over the last 16 years, debts of governments, households and corporations has gone up...everywhere, Forbes reported.

In the US, debt is up 63%. The eurozone, Japan, UK, Canada and Australia average around 52%. And emerging markets, led by China, leverage is up 85%. In some important emerging economies like Brazil, major cities are on the verge of bankruptcy. Rio is CCC credit thanks to mismanagement of a deep sea oil bonanza and over spending on the FIFA World Cup and the 2016 Olympics.

"The next financial crisis is likely to revolve around how this debt burden is managed," warns Neil MacKinnon, an economist with VTB Capital in London. "In the UK, most crises are related to boom and busts in the housing market, where there is an approximate 18-year cycle suggesting that the next bust will be in 2025." And for London real estate, they always have the Saudis, the Russians and the Chinese to save them.

But further south, in countries like France and Italy, credit downgrades are expected. Greece is making headlines once more for its inability to work out a debt deal with its lenders. 

There is now a rift between the European Union and the International Monetary Fund over Greek debt sustainability. Most of the debt is with the European Commission itself, so German policy makers are basically the lenders and so far are not willing to take a haircut on bond prices. 

The IMF predicts that the Greek debt-GDP ratio, now at 180%, will soar to 275%, all the while primary fiscal surplus is currently at zero. That means Greece's debt to GDP is like Japan, only without the power of the Japanese economy to back it up. Greece is broke.

"Greece is caught in a debt-trap which has shrunk the Greek economy by 25%," notes MacKinnon. They own Europe around €7 billion ($7.39 billion) in July. 

Jaime Caruana, general manager for the Bank for International Settlements recently hinted in a speech in Brussels that the core central banks might not know what they're in for.