U.S. Loss of AAA Badge a Reminder of ‘Regime Shift’ for Government Debt

Date: 14 August 2023 - 21:46

News ID: ۱۱۸۲۶۳

WASHINGTON (Reuters) -
Financial markets barely flinched when Fitch stripped the United States of its top credit rating, but it served as a reminder of longer-term structural risks investors in government bonds are yet to grasp.
The immediate focus in the aftermath of the Aug. 1 downgrade has been on U.S. governance, but Fitch Ratings also flagged higher rates driving up debt service costs, an aging population and rising healthcare spending, echoing challenges that reverberate globally.
David Katimbo-Mugwanya, head of fixed income at EdenTree Investment Management, a 3.7 billion-pound ($4.71 billion) charity-owned investor, said with the move highlighting reflecting elevated debt levels at a time when interest rates will likely remain high, debt sustainability was back in focus.
“I think it really brings home that shift being a regime shift rather than a cyclical one,” Katimbo-Mugwanya said.
Pressures investors will eventually face include ageing populations, climate change and geopolitical tensions.
Such risks are making some investors, including hedge fund manager Bill Ackman, bet on rising longer-term borrowing costs. Yet many investors say factors at play are too complex and their impact too far out to influence their investment decisions.
“The rating agencies are not looking at them in a systemic way. And the investors even less,” said Moritz Kraemer, former head of sovereign ratings at S&P Global, now chief economist at German lender LBBW.
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 prioritize 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.