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Debt risk is still threatening global finance
After the Spring Festival, the global financial market continues to face numerous risks. Old and new challenges are intertwined, with existing risks overlapping with emerging ones. Among these, sovereign debt risk remains a key driver of global financial instability. According to the IMF, in 2014, the total debt of developed economies reached $50.95 trillion, an increase of $2.32 trillion from the previous year. The debt-to-GDP ratio for developed economies stood at 108.32%, up 0.66 percentage points from the prior year, highlighting that debt risks continue to plague advanced economies.
First, the U.S. debt issue has seen some temporary relief. The U.S. Treasury report indicated that the fiscal deficit for the fiscal year was $680 billion, down from $1.09 trillion the previous year. This marked the first time in five years that the deficit dropped below $1 trillion. This reduction was mainly due to automatic spending cuts and increased tax revenues, which hit a record high. Although the deficit has decreased, it remains elevated, with the deficit-to-GDP ratio falling to 4.1%, still higher than the 1.2% level before the financial crisis. With federal debt exceeding $17 trillion, the U.S. debt burden is now at 105%. As the Fed moves away from its quantitative easing policy, reducing national debt or mortgage bonds could lead to a contraction in global liquidity.
Second, European debt still carries hidden risks. Despite progress, economic imbalances among EU member states pose long-term threats to the fiscal union. Spain and Italy have large public debts that exceed the capacity of eurozone support mechanisms. While Spain has made notable progress, it still faces challenges given its low starting point. Italy, although less pressured by immediate fiscal and external imbalances, lacks sufficient structural reforms to boost productivity, which remains a long-term concern. Thus, the development of a stronger fiscal union and banking alliance will face significant obstacles.
Third, Japan's debt financing pressures are rising. Structural imbalances persist despite government reforms. On one hand, the private sector holds excessive savings, while on the other, the government absorbs these savings through large fiscal deficits, leading to a sharp rise in public debt. In 2014, Japan’s budget reached a historic high of ¥95.88 trillion. The IMF estimated that Japan’s debt ratio would reach 245% in 2013. By 2014, government debt servicing accounted for nearly a quarter of current account spending. Additionally, as the Fed withdraws from QE, global bond yields are rising, pushing up inflation in Japan and reducing demand for government bonds, thereby increasing the country’s debt burden and financing risks.
In addition, debt risks in emerging economies are also growing. Unlike developed countries, emerging markets have shown a "leverage-up" trend post-crisis. Since 2008, weak global demand has reduced import needs, causing a drop in external surpluses for export-dependent economies. This has led to tighter access to foreign capital, forcing many emerging economies to rely on domestic or foreign borrowing, resulting in widespread leverage across their balance sheets. When the Fed began withdrawing from QE, slowing growth and tighter financial conditions worsened debt risks further.
According to Bloomberg data, after total debt issuance fell slightly in 2013 to $7.43 trillion from $7.6 trillion in 2012, G7 plus the top 12 emerging economies issued similar amounts in 2014. After accounting for interest, debt refinancing for 11 countries is expected to rise to $8.1 trillion in 2014. With global bond yields beginning to rebound from historic lows, borrowing costs and the risk of debt crises are set to rise, marking a clear sign of global financial fragility in 2014.