WARNING SIGNS

There is no shortage of research sounding alarm.

Without cuts to age-related spending, median net government debt will rise to 101% of gross domestic product in advanced and 156% in emerging economies by 2060, S&P Global Ratings said in a study this year.

S&P said the assumption that governments would prioritise servicing debt over spending promises had rarely been tested at such high debt levels.

It expects policy steps that will make ageing-related costs more manageable. Not taking them would see creditworthiness deteriorate and half the governments it rates would have metrics associated with junk credit ratings while even top-rated governments would lose the highest ratings, S&P said.

For the European Union and the euro area, where public pensions and healthcare play a major role, the European Commission and European Central Bank have also flagged costs related to ageing as a key risk to debt sustainability.

Japan is one major economy where financing costs remain low even as its debt exceeds 260% of GDP and it has one of the world’s oldest populations. But that reflects high domestic ownership of government debt and ultra loose monetary policy – a hard act to follow with higher inflation.

On the environmental front, a study last week showed a failure to curb carbon emissions will raise debt-servicing costs for 59 nations within the next decade.

“These long-term risks may not possess a well-established historical precedent, making reliance solely on historical data for risk assessment a challenge,” said Gael Fichan, head of fixed income at Swiss private bank Syz Group.

For now, despite the steepest increases in borrowing costs in decades, investors still see little risk in holding governments’ longer-term debt.

For example, the New York Fed estimates longer-term US Treasuries still yield less than rolling over short-term debt – a legacy of central bank government bond buying.

However, as central banks now roll off that debt and government financing needs rise, that should reverse, investors say. A recent rise in long-dated bond yields in reaction to a surge in US borrowing needs was a case in point.

“As the supply of long-dated Treasuries rises, investors may demand higher term premia to compensate for the added risk of holding bonds with longer maturities,” Fichan said.

Kraemer, the former S&P official, said it was “unreasonable” that shorter and longer-term government debt were rated the same.

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