The buildup in government debt threatens to push interest rates higher, says Hans Blommestein, head of public debt management at the Organization for Economic Cooperation and Development.
Gross borrowing needs of OECD governments will likely reach almost $16 trillion in 2009, up from an earlier estimate of about $12 trillion, he writes in the Financial Times.
That would represent a post-World War II high of 8.25 percent of GDP. That by itself is not good, of course.
“A looming additional challenge is the risk that, when the recovery gains traction and risk aversion falls further, yields will start to rise,” Blommestein says.
An unwinding of the massive central bank stimulus around the world also could push rates higher, he says.
“It could rock government securities markets by pushing up strongly longer-term rates on government bonds and perhaps also long-term mortgage rates,” Blommestein writes.
In the end, governments must get their budget deficits under control, he says.
“Over time, a return to a prudent medium-term fiscal strategy is an essential element of any credible exit strategy to bring debt service costs under control.”
Former Federal Reserve Chairman also is concerned about budget deficits and interest rates.
“The critical issue that economists worry about’’ is a vicious cycle of rising debt, debt service costs and interest rates, Greenspan said in congressional testimony.
“The debt service becomes explosive and that moves directly into the budget deficit.’’
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