Daily Update: Mounting Sovereign Debt Shows No Signs of Moderation
Today is Tuesday, July 9, 2024, and here’s your curated selection of essential intelligence on financial markets and the global economy from S&P Global. Subscribe to be notified of each new Daily Update.
Sovereign debt has been accumulating. The current increase in debt began with the global financial crisis in 2008–2011. Government debt for large, advanced economies rose again during the COVID-19 pandemic and after Russia’s invasion of Ukraine. Interest rates were low during this last episode of borrowing, making the cost of borrowing negligible for some large economies. As interest rates have increased and global conditions have normalized, governments have demonstrated little interest in reducing their borrowing. Even as GDP growth has recovered from the pandemic era, no G7 country is on track to return to a debt-to-GDP ratio consistent with the pre-pandemic period. Higher sovereign debt is showing remarkable staying power.
Credit analysts at S&P Global Ratings have been monitoring the growth of sovereign debt. Their recently published analysis, “Sovereign Debt In Large Advanced Economies: Up, Up, And Away,” examines the conditions that led to the increase in sovereign debt and those that conspire to keep government borrowing high. It also looks at a range of G7 countries with sharply higher debt-to-GDP ratios and assesses their ability to moderate borrowing soon.
The largest barrier to budgetary restraint among G7 countries is the election cycle. With many G7 countries holding elections this year, there is little political will to make the hard choices that would reduce debt-to-GDP ratios. Overall sovereign creditworthiness has declined since 2005. Among G7 nations, only Canada and Germany have a AAA rating for sovereign debt, compared to five countries in 2005. The most recent G7 country to be downgraded was France in late May. The UK, US, Ireland and Spain have all been downgraded since the global financial crisis.
The advantage for large, advanced economies is that borrowing has remained relatively cheap for them, even as interest rates have climbed. These countries can frequently finance themselves through reserve currencies and enjoy a large pool of domestic savings. In addition, G7 countries have a long track record of weathering macroeconomic shocks and financial market turmoil. Although the “mini-budget” that took down the leadership of former UK Prime Minister Liz Truss created a great deal of upheaval, that upheaval and the quick policy reversal that resulted are examples of the robust and reliable market forces that govern G7 debt. Emerging economies lack either this track record or the ability to borrow in their own currency. This keeps borrowing costs high for those economies that can least afford it.
The issue for some G7 countries — particularly Italy, France and the US — is that a kind of fiscal complacency has set in while sovereign debt accumulation has accelerated. With little political will among large, advanced economies to get the budgetary house in order, these countries will apparently wait on market forces to limit debt accumulation through increased borrowing costs.
This is an article from S&P Global. This article does not constitute a rating action, neither was it discussed by a rating committee.
Today is Tuesday, July 9, 2024, and here is today’s essential intelligence.
Written by Nathan Hunt.
Sustainability
Bio-LNG To Follow LNG Path To Europe's Net-Zero Future
European bio-LNG growth is set to follow in the footsteps of LNG as Europe transitions to a lower sulfur, carbon neutral future in both the transport and maritime sectors. With countries able to utilize the same infrastructure as LNG for bio-LNG, many firms have been looking to the biofuel to support Europe's energy goals that can work alongside the transitional fuel of LNG.
—Read the article from S&P Global Commodity Insights
Economy
Global PMI Signals Cooler Services Inflation In June, But Goods Prices Show Further Rise
Price pressures remained elevated globally, according to PMI survey data, as further signs of cooling in the service sectors of most major economies were in part countered by reviving cost pressures in the manufacturing sector. The latter poses a potential threat to efforts to tame inflation, which in many economies remains elevated relative to central bank targets. Worldwide PMI survey data compiled by S&P Global for J.P. Morgan showed average prices charged for goods and services rose globally at the slowest rate since January, registering the second-weakest monthly rise since October 2020. The rate of increase nevertheless remained elevated by pre-pandemic standards, as slower service sector inflation was offset by resurgent price pressure in the manufacturing sector.
—Read the article from S&P Global Market Intelligence
Capital Markets
European Banks: Covered Bonds Are A Cheap, Stable Funding Source With Limited Side Effects
Since 2022, European banks have been rethinking and adapting their funding models. This has come about in the new interest rate and monetary policy environment. Repaying central bank facilities and seeing flat growth in customer deposits has prompted banks to seek alternative funding sources, and for some, covered bonds have become an instrument of choice. S&P Global Ratings views covered bonds as a cheap and relatively stable source of market funding for European banks, and a valuable resource for accessing contingent funding.
—Read the article from S&P Global Ratings
Global Trade
Listen: Navigating Russian Oil Flows Amid Tightening Sanctions
The European Union's decision on 24 June to target Russian shipping company Sovcomflot in its latest round of sanctions comes as ship tracking data shows a 5% monthly increase in seaborne crude oil exports through June. With changes to Russian crude and oil product exports in firm view for market participants, S&P Global Commodity Insights' Francesco Di Salvo is joined by editors Robert Perkins, Elza Turner and Luke Stuart to discuss the latest flows and refinery news, as well as price sentiment for Russia's flagship Urals export grade.
—Listen and subscribe to the podcast from S&P Global Commodity Insights
Energy & Commodities
New UK Government Signals Taxing Times For North Sea Oil
A new UK government led by the Labour Party following the results of a general election July 5 opens the way for a significant shift in energy policy. Incoming Prime Minister Keir Starmer has pledged new taxes on North Sea oil producers and the creation of a national energy company. The following factbox outlines what to expect on energy from the new administration in Westminster.
—Read the article from S&P Global Commodity Insights
Technology & Innovation
AR/VR Hardware Makes Its Case As Ideal Platform For Genai
The Augmented World Expo moved to Long Beach, Calif., in 2024 after outgrowing the Santa Clara Convention Center, its home base since 2010, as the growing footprint of digital experiences in our everyday lives puts more eyes on the potential of augmented and virtual reality. Perhaps unsurprisingly, generative AI was top of mind at this year's expo (AWE), with virtual world developers and hardware vendors eager to accelerate their path to delivering crucial functionality and killer apps.
—Read the article from S&P Global Market Intelligence
Events & Webinars
Beyond ESG With Mid-Year Economic Outlooks (July 17, 2024)
As we look towards the second half of 2024, we invite you to join us on Wednesday, July 17 as we look back — and forward — at the key sustainability trends impacting mid-year economic outlooks.
—Register for the webinar from S&P Global Sustainable1