Weakening of Prime Minister Keir Starmer in the United Kingdom, “midterms” elections approaching in the United States, high-risk presidential election in France in 2027… War is not the only factor of uncertainty.
(AFP/FRED TANNEAU)
The world’s major economies are facing a surge in the cost of public debt caused by a bogged-down conflict in the Middle East, complicating already critical budgetary equations for many states.
Rising oil prices, inflation taking hold, central banks under pressure
… “The current situation is blowing a ‘perfect storm’ on the public debt market”, summarizes Vincent Juvyns, analyst for ING, interviewed by the
AFP
.
Interest rates at record highs
“While the stock markets remain resilient despite the strong uncertainties”, the debt market “is taking the right measure of the situation”, explains to the
AFP
Antoine Andreani, analyst for XTB.
Interest rates on state debts have been climbing since March
and the start of the war in the Middle East, because they include the surge in inflation caused by the rise in oil prices.
Since Friday, new milestones have been reached.
In the United States, the cost of 30-year debt reached its highest level since 2007 on Tuesday
and that at 10 years soared to a peak for more than a year. Japanese and British 30-year debts have reached records since 1999 and 1998 respectively.
A échéance 10 ans,
the German bond, a benchmark in Europe, is evolving at levels not seen since 2011.
“The trigger was the publication of several price indicators, which showed that
inflation sets in in the global economy
“, explains Vincent Juvyns. To compensate, investors demand higher interest rates from their debtors.
States on the grill
Weakening of Prime Minister Keir Starmer in the United Kingdom, “midterms” elections approaching in the United States, high-risk presidential elections in France in 2027… this rise in rates also bears the mark of growing market uncertainties regarding the States.
There is a “growing distrust in their ability to reduce their deficits”
so that we “now observe companies which borrow less expensively than countries” explains to the
AFP
Kevin Thozet, market analyst for Carmignac.
And with the crisis in the Middle East continuing, ”
governments are expected to spend more to support their households
and their businesses”, explains to the
AFP
Valentine Ainouz, head of rates at the Amundi Investment Institute. However, “the economic stagnation which is looming due to the consequences of the war will at the same time reduce tax revenues”, she explains. Investors therefore consider that there is “more risk in lending to States”.
Central banks under pressure
The budgetary equation is all the more tense as
inflation should push central banks “to raise their key rates”
on which all the interest rates of economies are based, explains Vincent Juvyns.
If the European Central Bank or the American Federal Reserve have not yet changed their policy, the prolongation of the war means that “in any case, inflation will set in in the coming months, even if an agreement is reached tomorrow”, he adds.
In the short term, this “does not change much” for the countries, because these increases affect the debt circulating on the secondary market, where the debt already issued is exchanged, explains to the
AFP
Christophe Boucher, investment director at ABN Amro. But “when states issue new bonds, this will increase the cost of debt which is already relatively high,” he adds.
What consequences?
The ratio of State debt to gross domestic product therefore risks soaring. In budgets, the item devoted to debt repayment could become increasingly important – it is already the equivalent of that of education in France.
This situation could push governments to
deploy rigorous policies
by raising taxes and cutting spending.
This would weigh on growth and “could also potentially weaken certain financial institutions, including banks whose balance sheets are largely based on public debt” with a risk of instability in the banking system, explains Christophe Boucher.
In Europe, France is considered at risk:
“It is one of the only European countries not to have put its public spending and its deficits back on a sustainable path,” he underlines.
