Page 15 - ISQ UK July 2020

JULY 2020

The Burden of Debt

Chris Bailey, European Strategist, Raymond James Investment Services

Partially due to government fiscal responses to the
COVID-19 pandemic challenge, global debt levels are Rather go to bed without dinner than to rise in debt -
growing. Gross government debt issuance is currently Benjamin Franklin
running at over two trillion U.S. dollars a month, more
than double the 2017-19 average of just shy of a trillion as a central bank keeps on printing money to buy government
dollars. Meanwhile, the International Monetary Fund bonds, the scope for bond yields to get chased down can be
(IMF) warned last month in their most recent World apparent. Certainly the world of the last eleven years has seen
plenty of evidence of this.
Economic Outlook publication that ‘elevated debt
levels... could constrain the scope of further fiscal As it happens, compressed bond yields via quantitative easing
purchasing go back much further than this. Japan has been an
support - and will pose an important medium-term
unusual fixed income market over more than twenty years. Not
challenge for many countries’. only has there been a deep and regular flow sourced from the
high savings rates of the local populace but government direct
And yet global sovereign bond yields typically remain
exceptionally muted. Looking at benchmark ten year government participation in the fixed income markets has frequently seized
paper, for major developed market economies only Italy and up the Japanese government bond market. Volatility for
South Korea yield over 1% (and in both cases only modestly so). practitioners has been remarkably low but there has been
Germany, France and the Netherlands will even offer you a liquidity trade-offs. And in such a world the reliance on that
negative yield. And all these numbers in real terms after inflation regular flow of savings is important, otherwise the risk is an
are even lower. ultimate lack of central bank credibility including potential
inflationary consequences. My instinct is that Japanification is
As every mortgage borrower knows, the rate of interest charged not as easy as it sounds for countries in Europe and the Americas,
on debt does matter. Looking at the above, there appears to be let alone what it implies for the economic growth backdrop.
an almost riskless payoff for borrowing more money. However,
just when you think it is safe to go back into the water… Benjamin Franklin’s instincts are undoubtedly correct in a binary
choice but in practical policy terms there are three broad policy
The first key for the maintenance of this strange backdrop is initiatives a government can enact to counter a build-up in their
global quantitative easing by the world’s major central banks. public debt burden - and these have not changed since classical
Drawing on the laws of supply and demand, if a big player such times.

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