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Financial bosses in Lakeside look away from the mountain of looming debt
(Bloomberg) — Global financial chiefs gathered this week in the shadow of the Italian Alps probably won’t look much at one of the biggest mountains in the foreground: their own debt.
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Despite a trajectory of increased borrowing and the International Monetary Fund’s declaration last month that “now is the time” to restore sustainable fiscal policies, this issue does not appear on the formal agenda of Group of Seven finance ministers, who will gather in the city by the lake. from Stresa.
The sensitivity of the issue is not surprising, given looming electoral tests in the US, UK and European Union – and a precarious fiscal situation in Italy, the host country. Still, with high borrowing costs taking a toll and debt mounting, the lack of a collective resolution risks piling up problems.
“Debt is definitely the elephant in the room at this G-7,” said Koen De Leus, chief economist at BNP Paribas Fortis in Brussels and co-author of a new book focusing on public finance, The New World Economy in 5 Trends. “But it is difficult to address this issue now, before the elections, because there are no easy solutions.”
The meeting, which begins with dinner on Thursday and formally kicks off on Friday, will focus mainly on the use of revenue generated by frozen Russian assets to help Ukraine, international taxation and the implications of artificial intelligence, among topics announced by its president, the Italian Finance Minister. Giancarlo Giorgetti.
The meeting at Lake Maggiore – the scene of a failed peace conference before the Second World War – is typical of Italy’s tradition of spectacular G-7 venues. Other locations used this year include the island of Capri for foreign ministers last month, and a luxury resort in southern Italy for leaders in June.
But there are no Instagram-worthy scenarios that can obscure the country’s challenges. While investors have given Prime Minister Giorgia Meloni leeway by reducing the country’s bond spread over Germany’s to the lowest level in two years, prospects are deteriorating amid the costly legacy of a tax break for home renovations in the pandemic era, known as “super bonuses”.
Scope Ratings predicted last week that Italy will have Europe’s largest loan pile in just three years, and on Monday the IMF issued an annual assessment calling for “faster than planned” action.
This message is in line with the fund’s recommendation for the world as a whole in April, identifying a window of opportunity for budgetary repair in a context of prospects for a soft landing for economies and more benign inflation.
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Anguish over rising debt levels is being felt across markets, where historically high deficits in some G-7 countries have kept alive the risk of so-called bond vigilantes – a term for fixed income investors who demand higher yields. high to compensate for excessive governments. loan.
They can exert influence over fiscal policy, forcing authorities to control spending, and were particularly disruptive during Europe’s sovereign debt crisis. Currently, markets are nowhere near these stress levels, but concerns persist.
“If you have a lot of debt, you’re going to have problems,” said Rob Burrows, portfolio manager at M&G Investments. “It’s one of those questions that keeps me up at night, thinking: How are we going to get out of this?”
Last month’s IMF forecast shows that G-7 debts will rise again this year, after a post-pandemic trough, and that they will do so until 2029. The global deficit will narrow only slightly to 4.6% over that period.
The fund singled out the US, predicting that if current flexible policies remain in place, its debt will nearly double within three decades, and will be just 134% of production within five years.
The UK and France also face rising borrowing, while Japan’s pile appears to stabilize at the astonishing level of over 250% of GDP. Within the G-7, only Germany and Canada will reduce debt.
While each country’s situation is different, common themes explaining the growing burden include increasing responsibilities linked to an aging population and climate change, rising defense costs to deter Russian aggression, and limited tolerance among voters. regarding fiscal containment.
The elections taking place this year in the US and the UK, as well as the vote for the European Parliament in June, which is coloring the discourse in the region, highlight the difficulty of doing much to fix public finances at this time.
The reticence to discuss fiscal challenges is not restricted to the G-7. Its larger counterpart, the Group of 20, intentionally avoided the issue when it met in February, following objections from China to a mention in the meeting’s declaration.
Based on previous communiqués, G-7 ministers can at least pay lip service to the need for “medium-term sustainability” of public finances, but that may be as far as they go. For Veronica De Romanis, professor of political economy at LUISS University in Rome, this is a concern.
“It’s clear that politicians are procrastinating,” she said. “Without a shift towards fiscal restraint, sooner or later we will face a reality check.”
–With assistance from Viktoria Dendrinou, Jorge Valero, William Horobin, Toru Fujioka, Kamil Kowalcze, Tom Rees and Alice Gledhill.
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