IMF says higher bond yields make fiscal consolidation urgent as debt nears 100% of GDP

Centre · 2The International Monetary Fund said on Wednesday 14 October that rising sovereign bond yields are adding to fiscal pressure, and urged advanced economies and others to act urgently to reduce spending, cut deficits and lower debt. 1 2 Centre · 2The message came in an IMF blog post and in comments by Rodrigo Valdes, head of the IMF's Fiscal Affairs department, ahead of the IMF and World Bank annual meetings in Bangkok; the blog was co-written with deputy head Era Dabla-Norris. 2 3 Centre · 1Valdes said average public debt was poised to reach 100 per cent of GDP, the highest since World War Two, leaving less margin for delay. He told Reuters that this year's fiscal results were worse than expected six months ago and worse than a year ago, and that most countries were looking at spending more rather than tightening. 1 3

Centre · 2The IMF said the Group of Seven's average 10-year government bond yield rose by more than 110 basis points between February and September, to its highest level in nearly two decades. It attributed the rise to high oil prices, persistent inflation, stronger investment demand and higher-than-expected AI growth. 3 2 Centre · 1The IMF projected the effective average cost of government financing to rise to 3.7 per cent by 2031 from 2.3 per cent in 2021. US interest payments were expected to reach 5.3 per cent of GDP, up from 2.8 per cent before the pandemic and roughly equal to projected Social Security spending. 1 Centre · 2Emerging economies were projected to spend almost 11 per cent of tax revenue on debt service over the next five years, against about 7 per cent in 2011-2019, and advanced economies more than 9 per cent against around 6 per cent. CNA reported that low-income countries now spend over 15 per cent of tax revenue on interest. The global primary deficit was about 3.3 per cent of GDP this year and expected to widen. 2 1

Centre · 2The IMF said advanced economies are refinancing more debt at shorter maturities, so higher rates feed through faster; for the G7 and Spain the share of debt maturing within a year approaches 30 per cent. It also said interest rates on new debt now exceed expected nominal growth in a growing number of economies, so governments need stronger primary balances to stop debt ratios rising. 1 2 Centre · 1Valdes said the challenge for major high-debt advanced economies is to build political support for concrete medium-term plans to contain borrowing costs and limit spillovers. The blog said 'the more countries wait, the more painful the adjustment becomes'. 1 Centre · 2The IMF said financing conditions for many emerging and developing economies remain favourable but may not last, and urged them to reduce vulnerabilities and strengthen debt management. For low-income countries it recommended stronger tax systems and more efficient spending. 1 2

Centre · 1With inflation above target and energy prices higher, the IMF said central banks would likely keep rates higher for longer, limiting governments' room to respond to downturns as demands for spending on defence, energy security and ageing populations grow. Valdes estimated that broad-based energy-price shielding measures cost about half a percent of global GDP. 1 Centre · 1SCMP added that US Treasury yields were at 24-year highs and that the US, France and Japan had drawn attention as yields reached multi-year highs, with the US Treasury Secretary Scott Bessent outlining plans to cut federal debt after liabilities topped US$41 trillion. It said higher yields in advanced economies could raise funding costs for emerging markets. 2