[China & SEA]Tighter monetary policies in the US and Europe push up global debt risks
Lian Jun Economic Daily
In recent times, inflation data has continued to climb making the sound of interest rate hikes in developed economies such as the US and Europe tighten, which in turn has pushed up global debt risks. This has not only put greater pressure on emerging markets and developing economies, but also put the economies of the US and Europe and other countries to a severe test.
On June 10, the U.S. Department of Labor released data showing that the U.S. Consumer Price Index (CPI) rose 1% in May, up 8.6% year-on-year, both indicators exceeded market expectations. Some analysts pointed out that before the release of this data, the market was once optimistic about "inflation hitting the roof", but it was not to be, and the high level of data deepened the market's concern about the Fed's continued rapid rate hikes.
The rapid tightening of monetary policy in the US is pushing up debt risk globally. The US dollar has international reserve currency status and its supply and interest rate changes are important factors affecting global debt. With the Fed's interest rate hike leading to a tightening of global liquidity, it will trigger a rise in financing costs, a tightening of the financial environment and international capital outflows. The cost of debt in emerging economies will rise sharply, and the difficulty in obtaining new credit will increase significantly, increasing pressure on debt servicing and the risk of debt default. At the same time, the scale of global debt has risen sharply since the onset of the epidemic, with the situation more prominent in emerging markets and developing economies in particular. IMF Managing Director Georgieva wrote a short while ago that about 60% of low-income countries currently have serious debt problems and some countries need debt restructuring.
A rapid tightening of monetary policy would likewise exacerbate the US' own debt risks. As the US authorities have used fiscal and monetary policies without restraint to stimulate the economy in recent years, the total amount of debt accumulated has been astronomical. At the beginning of February this year, the US Treasury Department released data showing that the size of the US federal government debt exceeded the US$30 trillion mark. A report released by the Federal Reserve Bank of New York in early February also showed that the total debt of US households had increased by US$1.02 trillion in 2021 to nearly US$16 trillion due to the surge in housing and auto loans.
The Fed's interest rate hike will cause a rapid rise in borrowing costs for the US government and households. From the government's side, the US Congressional Budget Office released a report on 25 May showing that rising interest rates and increased debt will lead to a doubling of net interest payments as a percentage of US gross domestic product over the next 10 years, from 1.6% in 2022 to 3.3% in 2032, well above the 50-year average of 2.0%. From the household side, the Fed's rapid interest rate hikes will increase the cost of debt for US consumers, worsening the household cash flow situation and thus curbing consumption growth. on 10 June, Michigan State University released preliminary data showing that the US consumer confidence index stood at 50.2 in June, significantly lower than market expectations of 58.5 and 58.4 in May. this does not bode well for the already negative growth in the US in the first quarter. This does not bode well for the US economy, which had already experienced negative growth in the first quarter. If you add in the corporate debt, which cannot be counted exactly, it is easy to see that the risk of a recession in the US is rapidly increasing.
Europe's debt problems are no less acute. Under high inflationary pressure, the ECB announced on 9 June that it had decided to stop net asset purchases from 1 July and planned to raise its key interest rate by 25 basis points in July. To stimulate economic recovery in the Eurozone, the ECB entered the era of negative interest rates from June 2014 and today the ECB's key refinancing rate, marginal lending rate and deposit facility rate are maintained at 0.00%, 0.25% and negative 0.50% respectively. Some analysts point out that this interest rate environment allows some governments, enterprises and households to take it for granted, but the level of government debt in some European countries is like a "weir" in general at a worryingly high level, if Europe starts to raise interest rates, those countries with high debt levels and slow economic growth are not unlikely to have a debt crisis.
The debt risks faced by the US and Europe will not only threaten their own economic growth, but will also bring negative spillover effects to the world. Some analysts point out that a recession in the US will cause a decline in global external demand, weaken the safety of US dollar reserve assets and intensify global financial turmoil. Last week, the World Bank and the OECD sharply lowered their global economic growth expectations for this year to around 2.9% and 3% respectively.
The world needs more pragmatic coordination and cooperation in the face of a tough economic situation, and at the 12th BRICS Economic and Trade Ministers' Meeting on 9 June, the ministers agreed to strengthen cooperation in areas such as the digital economy, trade and investment and sustainable development, supply chains, and the multilateral trading system. Compared to the frequent bad news from the US and Europe, this should be one of the few bright spots in the world economy last week.