US-Led Rising Debt Across G-7 Stokes S&P and Scope Concerns

(Bloomberg) -- Relentlessly rising debt in the US and rich-world peers was highlighted by two credit-assessment companies, with S&P Global Ratings warning that only acute market pressure can alter the trajectory.

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The analyses of Group of Seven and equivalent economies intensify the spotlight on their borrowing in a week when two face elections, and after the Bank for International Settlements cautioned that governments are vulnerable to a precipitous loss of confidence.

In S&P’s report on Thursday, it suggested the prospect that the US, Italy and France will manage to keep debt at already elevated current levels is remote.

“At the current stage in their electoral cycles, only a sharp step-up in market pressures could persuade these governments to implement a more resolute budgetary consolidation,” analysts led by Frank Gill wrote. “That said, a sharp deterioration of borrowing conditions would also increase the size of the required fiscal adjustment.”

Scope Ratings pointed to the pressure that persisting higher borrowing costs will heap on the budget positions of those countries and the UK — a shift that will “heighten the stakes for sovereign debt sustainability.”

Both reports were released on a day when US markets are closed for July 4, with their observations arriving at a sensitive time in the electoral cycle there and elsewhere. Joe Biden faces mounting pressure to drop out of the 2024 presidential race, UK citizens go to the polls on Thursday, and their French peers will vote for a new parliament this weekend.

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On Sunday, the BIS released a report accompanied by a warning from Chief Economist Claudio Borio that market experience shows that “things look sustainable until suddenly they no longer do.”

The US, as the world’s largest economy, remains a focal point of concern. Last week, the International Monetary Fund blasted the country for its borrowing. On Tuesday, Federal Reserve Chair Jerome Powell once again acknowledged that “the level of debt that we have is not unsustainable, the path that we’re on is unsustainable — that’s completely non-controversial.”

Both ratings companies honed in on the frequent Congressional arguments over the debt ceiling, where brinkmanship is followed by lawmaker agreement to raise or suspend that limit to avoid financial-market fallout. Scope analyst Dennis Shen said such debates showcase how hard it is to repair the public finances.

“If, at this stage, a looming threat of default is needed to compel comparatively moderate cuts of the Fiscal Responsibility Act of 2023, this underscores the pressures that might be needed to ensure a stable debt trajectory,” he wrote.

Similarly, Gill at S&P highlighted the lack of consensus in the US on the need for fiscal restraint.

“Broad, bipartisan support on proactive measures to meaningfully reduce high fiscal deficits and curtail the rise in government debt has been elusive,” he said. “This affects creditworthiness.”

France, whose snap election prompted investors concerned about the country’s fiscal resolve to demand a higher premium on its debt, also drew the ratings companies’ scrutiny.

S&P noted that the outlook for its public finances is now more uncertain but said that there’s a “silver lining” — if Sunday’s election leads to a hung parliament that can’t agree on a budget, the 2024 one would then apply.

Shen at Scope cautioned, however, that rising debt there could stoke more investor unease after a “material” widening in the country’s bond spread over German equivalents.

“A new government needs to continue cooperative relations with France’s neighbors and the European Union and pursue coherent fiscal consolidation,” he said. “The spread could easily widen more if the sustainability of French debt is called into question.”

While the UK did experience market turmoil in 2022 over its fiscal plans, that won’t be enough to encourage public finance repair in the future, given the plans of the opposition Labour party that is poised to win the general election, he added.

“Memories of the mini-budget crisis two years before are unlikely alone to be enough to ensure tight fiscal policy,” Shen said.

(Updates with UK in final paragraph. A previous version corrected a name spelling in ninth paragraph)

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