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Debt risk is still threatening global finance
After the Spring Festival, global financial markets continue to face a complex landscape filled with both old and new risks. The intertwining of long-standing issues with emerging challenges has created a volatile environment. Among these, sovereign debt risk remains a central factor contributing to 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 year-on-year, highlighting the persistent nature of debt-related concerns.
First, the U.S. debt issue has seen some temporary relief. The U.S. Treasury reported a fiscal deficit of $680 billion for the fiscal year, down from $1.09 trillion the prior year—marking the first time in five years that the deficit fell below $1 trillion. This reduction was mainly driven by automatic spending cuts and increased tax revenues, which hit a record high. However, despite this progress, the deficit remains elevated, with the deficit-to-GDP ratio dropping to 4.1%—a significant improvement from 6.8% in 2012 and 10.1% in 2009—but still well above the pre-crisis level of 1.2%. With federal debt surpassing $17 trillion, the U.S. debt burden rate is now at 105%. As the Federal Reserve begins to taper its quantitative easing program, reducing national debt or mortgage-backed securities could lead to a contraction in global liquidity, further heightening financial market volatility.
Second, Europe continues to grapple with hidden debt risks. Although the region has made some progress, underlying imbalances among member states pose challenges for future fiscal integration. Spain and Italy, in particular, have large public debts that exceed the capacity of eurozone support mechanisms. While Spain has made notable strides, it still faces considerable hurdles due to its lower starting point. Italy, on the other hand, experiences less immediate pressure but struggles with insufficient structural reforms that hinder productivity growth. These issues suggest that the path toward a stronger fiscal union and banking alliance remains difficult and uncertain.
Third, Japan's debt financing pressures are increasing. Structural imbalances persist, with the private sector holding excess savings while the government absorbs them 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. According to the IMF, Japan’s debt-to-GDP ratio was expected to reach 245% in 2013. Government debt servicing accounted for nearly a quarter of total fiscal expenditure. As the Fed reduces its stimulus, rising bond yields and inflation in Japan may reduce demand for government bonds, increasing the country’s debt burden and sovereign risk.
In addition, emerging economies are also witnessing a rise in debt risk. Unlike developed nations, many emerging markets have experienced a "leverage-up" trend post-2008. A lack of global demand has led to reduced imports and shrinking external surpluses, tightening liquidity access for these countries. To cope, they often rely on foreign financing or internal measures, resulting in higher leverage across their economies. As the Fed withdraws from quantitative easing, slowing growth and tighter financial conditions have worsened debt risks in these regions.
According to Bloomberg, total debt issuance fell slightly in 2013, from $7.6 trillion to $7.43 trillion. In 2014, G7 countries plus the top 12 emerging economies are expected to issue similar levels of debt. After accounting for interest, debt refinancing costs for 11 countries are projected to rise by about $712 billion, reaching $8.1 trillion. With global bond yields beginning to rebound from historic lows, borrowing costs are likely to rise, increasing the risk of debt crises. This trend reflects the growing fragility of the global financial system in 2014.
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