Agencies
Massive debt piles among the world’s biggest economies are causing concern in financial markets once again, as upcoming elections add uncertainty to the fiscal outlook.
French bonds took a beating after a surprise election, and hefty spending plans caused alarm. U.S. debt dynamics are in focus ahead of a November presidential election.A debt crisis is not the base case, but investors are alert to the risk of looser purse strings sparking market stress.
"Deficits are back in focus,” said Guy Miller, chief market strategist at Zurich Insurance Group."There needs to be more attention placed on not just the debt, but how to generate a growth dynamic – particularly in Europe,” he added.
Here’s a look at five big developed economies on the worry list: A surprise election was a rude awakening to investors who had previously looked past France’s creaking public finances. With a budget gap at 5.5% of output last year, France faces European Union disciplinary measures.France’s bond risk premium over Germany briefly surged last month to the highest since 2012’s debt crisis as the far right pushed ahead in the election race.A leftist alliance ultimately won and a hung parliament may limit its spending plans but could also hamper any action to strengthen France’s finances.
France’s national audit office chief said on Monday there was no room for maneuver on the budget and debt must be reduced.Even before a new government, the EU expected debt at around 139% of output by 2034, from 111% currently. France’s risk premium has eased but remains relatively high.
"There’s going to be a permanent fiscal premium embedded in the price,” said David Arnaud, fund manager at Canada Life Asset Management.
The U.S is not far behind. The Congressional Budget Office reckons public debt will rise from 97% to 122% of output by 2034 – more than twice the average since 1994.
Growing expectations that Donald Trump will win November’s presidential election have lifted Treasury yields recently as investors have priced in the risk of larger budget deficits and higher inflation. Some investors reckon the worst outcome for bond markets would be a Trump presidency with a Republican-led House of Representatives and Senate.
That would mean "we can get another round of fiscal stimulus ... from a starting point in which the deficit is 6% of GDP,” said Legal & General Asset Management’s head of macro strategy Chris Jeffery.
While U.S. Treasuries are buffered by their safe-haven status, the yield curve is near its widest since January, reflecting the pressure facing longer-term borrowing costs.
Investors have praised nationalist Prime Minister Giorgia Meloni as market friendly. Yet last year’s 7.4% budget deficit was the highest in the EU. So Italy also faces EU disciplinary measures that will test market optimism.
Italian bonds have outperformed their peers. However, the risk premium on Italy’s bonds briefly hit a four-month high in June, as French bonds sold off, reflecting how quickly jitters can spread.
Rome aims to lower the deficit to 4.3% this year, but has a dismal track record recently for meeting fiscal goals.
Home renovation incentives costing over 200 billion euros since 2020 will put upward pressure on Italian debt for years. The EU executive projects debt rising to 168% of output by 2034 from 137% now.