World’s Biggest Economies Face $7.6 Trillion Bond Tab as Rally Seen Fading

Here are some interesting numbers to digest. Wow???

tom:thanx for a great response;  informed and well thought out. I plan to include it on my blog when I flesh out my entire thoughts.  BUT, I disagree with your conclusions.

 debt matters:

1.         how does the debt compare with income? and our ability to pay it down. to maintain liquidity, debt must be paid  down.

2.         when debt exceeds GDP, as we are faced with at this instant, one becomes vulnerable to the equilibrium trap  which the euro is facing and japan faces in spades!!  we are all lucky now because interest rates are suppressed at  give/take  1%.  but excessive debt eventually leads to inflation because that is the only way to get rid of excessive debt liabilities like social security.

3.         how does the rate of debt interest compare with the rate of gdp growth; and all the permutations and combinations of such a rate analysis?

4.         what is the rate of population growth? this is critically important for the euro and japan where fertility rates have plunged.  fortunately the usa is growing because of legal and illegal immigration;  and someday will reach 500 million, perhaps before 2050; at which time the USA will be totally bilingual with spanish the dominant language and english the univeral business language.

5.         how will the debt be repaid? either by (1) cutting spending; (2) default; (3) contrived inflation.  Economist Klugman (sic) favors (2) and  (3) in a recent article, which will piss off the chinese but will particularly hurt seniors in the USA;  and that is when political alignments will be realigned for a long time. Unfortunately raising taxes cannot solved the debt problem; why? not enough of a tax base. the top 10% are already paying 75% of the taxes.  and when people en masse start to really cheat and avoid taxes, the government is held hostage, (like Greece and Italy). Our jails are already too crowded.

6.         what is the rate of growth of the debt

7.         and ad nauseum!

The Japanese culture is among the finest on the planet.  Homogeneous, tough minded and hard working people with the tightest of all cultures on the planet. [thank God and HST, we did not invade Japan. We would have had to kill off all 100 million Japanese men, women and children.]  Their economy was recently crippled with the worst natural disaster [quake and tsunami] in decades and they did not blink nor whine or play the blame game like the democrats and the N'orleaners;  they pull together and rebuild. Yes, they have self-financed and own their enormous debt per capita.  BUT THEY ALSO KNOW their culture will be crippled because their fertility rate is only 1.39 causing their population to rapidly decrease as it doing right now as we talk; and when they decide to take action (not sure how?) it may take 100 years to recover. so they are leaving a massive debt per capital problem for their children.

Tom's original reply on next page.   NOTE:  I probably missed an important point:  Ask a mortgage holder who is underwater whether debt matters.

Joe, This article shows several interesting views of the various debt loads of the various countries.

Japan has by far the largest Debt Load of all the countries in the world.  Is it a concern for Japan?  Apparently not because it only pays about 1% interest to those who buy its bonds.  How can this be?  Who are the kooks who buy Japan bonds for only a 1% return?  Most of Japan’s Debt is financed internally by its own citizens.  So, this seems to indicate that just having a Huge Debt Load is not necessarily a cause for concern.

Why is it all the Tea Partiers and their elected Republicans representatives in Congress are all paranoid about the US Debt?  The US government pays a very low % to purchasers of its bonds.  Admittedly it is somewhat higher than what Japan pays, but what is the big deal?  Who are the kooks who purchase US bonds for such a paltry return?  It is those poor souls in the US who saved all their lives and invested in the “safety” of US government bonds.  They are being fried on the spit erected by Dubya and Greenspan and continued by O’Bama and Geithner.  So, in the case of the US, what is the big deal about having such a Huge Debt Load?

It is all plain old fashioned hog wash.  It is like the Bear chasing the hunters.  As long as both hunters can run faster than the bear, neither has anything to worry about.  As soon as the bear runs faster than the hunters, then the issue becomes which of the hunters can run faster than the other.  The same thing is going on with the world’s countries and their respective debts.  As long as there are buyers of their bonds for reasonable % rates.  Everything will be fine.  However, if as in the case of the Euro countries, some run up increasing amounts of debt with no foreseeable expansion in their respective economies, then the bear in the form of their Debt runs faster than their economies can expand and that is when the bear pounces and crushes their economies.  2012 will be an interesting year.

In the US, it appears that the economy is beginning to expand, employment is beginning to accelerate.  The question becomes will the economy accelerate quickly enough to offset any drag created should the European economies falter even more so than expected.  What was particularly troubling was to see Spain miss its Debt to GDP target of 6% and rise to 8%.  The reaction of the new government in Spain is to impose greater austerity on the Spanish economy.  I think this is wrong.  Creating barriers to growth will only make matters worse.  The world needs a balanced healthy expansion of their respective economies.  To follow what the Republicans are proposing and what Spain is doing is creating dampers to growth.  This approach only makes matters worse.

This article makes it absolutely clear that having a Huge Debt Load is not necessarily a bad thing. Tom


Dec. 30 (Bloomberg) -- David Mann, regional head of research for the Americas at Standard Chartered Plc, talks about the European debt crisis and the willingness of the Federal Reserve and European Central Bank to provide "unlimited" liquidity to stem the turmoil. Mann speaks with Pimm Fox on Bloomberg Television's "Surveillance Midday." (Source: Bloomberg)

Governments of the world’s leading economies have more than $7.6 trillion of debt maturing this year, with most facing a rise in borrowing costs.

Led by Japan’s $3 trillion and the U.S.’s $2.8 trillion, the amount coming due for the Group of Seven nations and Brazil, Russia, India and China is up from $7.4 trillion at this time last year, according to data compiled by Bloomberg. Ten-year bond yields will be higher by year-end for at least seven of the countries, forecasts show.

Investors may demand higher compensation to lend to countries that struggle to finance increasing debt burdens as the global economy slows, surveys show. The International Monetary Fund cut its forecast for growth this year to 4 percent from a prior estimate of 4.5 percent as Europe’s debt crisis spreads, the U.S. struggles to reduce a budget deficit exceeding $1 trillion and China’s property market cools.

“The weight of supply may be a concern,” Stuart Thomson, a money manager in Glasgow at Ignis Asset Management Ltd., which oversees $121 billion, said in a Dec. 28 telephone interview. “Rather than the start of the year being the problem, it’s the middle part of the year that becomes the problem. That’s when we see the slowdown in the global economy having its biggest impact.”

Competition for Buyers

The amount needing to be refinanced rises to more than $8 trillion when interest payments are included. Coming after a year in which Standard & Poor’s cut the U.S.’s rating to AA+ from AAA and put 15 European nations on notice for possible downgrades, the competition to find buyers is heating up.

“It is a big number and obviously because many governments are still in a deficit situation the debt continues to accumulate and that’s one of the biggest problems,” Elwin de Groot, an economist at Rabobank Nederland in Utrecht, Netherlands, part of the world’s biggest agricultural lender, said in an interview on Dec. 27.

While most of the world’s biggest debtors had little trouble financing their debt load in 2011, with Bank of America Merrill Lynch’s Global Sovereign Broad Market Plus Index gaining 6.1 percent, the most since 2008, that may change.

Italy auctioned 7 billion euros ($9.1 billion) of debt on Dec. 29, less than the 8.5 billion euros targeted. With an economy sinking into its fourth recession since 2001, Prime Minister Mario Monti’s government must refinance about $428 billion of securities coming due this year, the third-most, with another $70 billion in interest payments, data compiled by Bloomberg show.

Rising Costs

Borrowing costs for G-7 nations will rise as much as 39 percent in 2011, based on forecasts of 10-year government bond yields by economists and strategists surveyed by Bloomberg in separate surveys. China’s 10-year yields may remain little changed, while India’s are projected to fall to 8.02 percent from about 8.39 percent. The survey doesn’t include estimates for Russia and Brazil.

After Italy, France has the most amount of debt coming due, at $367 billion, followed by Germany at $285 billion. Canada has $221 billion, while Brazil has $169 billion, the U.K. has $165 billion, China (PRCH) has $121 billion and India $57 billion. Russia has the least maturing, or $13 billion.

Rising borrowing costs forced Greece, Portugal and Ireland to seek bailouts from the European Union and IMF. Italy’s 10- year yields exceeded 7 percent last month, a level that preceded the request for aid from those three nations.

Bad Combination

“The buyer base for peripheral Europe has obviously shrunk at the same time that the supply coming to the market is increasing, which is not a good combination,” said Michael Riddell, a London-based fund manager at M&G Investments, which oversees about $323 billion.

The two biggest debtors, Japan and the U.S., have shown little trouble attracting demand.

Japan benefits by having a surplus in its current account, which is the broadest measure of trade and means that the nation doesn’t need to rely on foreign investors to finance its budget deficits. The U.S. benefits from the dollar’s role as the world’s primary reserve currency.

Japan’s 10-year bond yields, at less than 1 percent, are the second-lowest in the world, after Switzerland, even though its debt is about twice the size of its economy.

The U.S. attracted $3.04 for each dollar of the $2.135 trillion in notes and bonds sold last year, the most since the government began releasing the data in 1992. The U.S. drew an all-time high bid-to-cover ratio of 9.07 for $30 billion of four-week bills it auctioned on Dec. 20 even though they pay zero percent interest.

Tougher Year

With yields on 10-year Treasuries (USGG10YR) below 2 percent, an increasing number of investors see little chance for U.S. bonds to repeat last year’s gains of 9.79 percent. The U.S pays an average interest rate of about 2.18 percent on its outstanding debt, down from 2.51 percent in 2009, Bloomberg data show.

‘Given how well they have done, we don’t think they’re any longer a very good hedge,’’ Eric Pellicciaro, head of global rates investment at New York-based BlackRock Inc., which manages $1.14 trillion in fixed-income assets, said in a Dec. 16 telephone interview.

The median estimate of 70 economists and strategists is for Treasury 10-year note yields to rise to 2.60 percent by year-end from 1.88 percent as of Dec. 30. In Japan, the forecast for the nation’s benchmark note yield is 1.35 percent, while it’s expected to rise to 2.50 percent in Germany, from 1.83 percent last week.

Central Banks

Central banks are bolstering demand by either keeping interest rates at record lows or reducing them, and by purchasing bonds through a policy know as quantitative easing.

The Federal Reserve has said it will keep its target rate for overnight loans between banks between zero and 0.25 percent through mid-2013, and is now selling $400 billion of its short- term Treasuries and reinvesting the proceeds into longer-term government debt in a program traders dubbed Operation Twist.

The Bank of Japan has kept its key rate at or below 0.5 percent since 1995, and expanded the asset-purchase program last year to 20 trillion yen ($260 billion). The Bank of England kept its main rate at a record low 0.5 percent last month, and left its asset-buying target at 275 billion pounds ($426 billion).

The European Central Bank reduced its main refinancing rate twice last quarter, to 1 percent from 1.5 percent. It followed those moves by allotting 489 billion euros of three-year loans to euro-region lenders. That exceeded the median estimate of 293 billion euros in a Bloomberg News survey of economists. The central bank will offer a second three-year loan on Feb. 28.

‘Flush With Liquidity’

The money from the ECB may be used by banks to buy government bonds, according to Fabrizio Fiorini, the chief investment officer at Aletti Gestielle SGR SpA in Milan.

“The market is now flush with liquidity after measures taken by central banks, particularly the ECB, and that’s great news for risky assets,” Fiorini said in a telephone interview on Dec. 20. “The market will have no problem taking down supply from countries like Spain and Italy in the first quarter. In fact, they should be able to raise money at lower borrowing costs than what we saw in recent months.”

Italy’s sale last week included 2.5 billion euros of 5 percent bond due in March 2022, which yielded 6.98 percent. That was down from 7.56 percent at an auction Nov. 29. It also sold 9 billion euros of bills on Dec. 28 at a rate of 3.251 percent, compared with 6.504 percent at the previous auction on Nov. 25.

‘Phony War’

Investors should be most worried about the period after the ECB’s second three-year longer-term refinancing operation scheduled in February, according to Ignis’s Thomson.

“The amount of liquidity that has been supplied by central banks, with more to come from the ECB in February, suggests the first couple of months will be a sort of phony war as far as the supply is concerned,” Thomson said.

The ECB has bought about 212 billion euros of government bonds since starting a program in May 2010 to contain borrowing costs for Greece, Portugal and Ireland. It began buying Spanish and Italian debt in August, according to people familiar with the trades, who declined to be identified because they weren’t authorized to speak publicly about the transactions.

“There’s a lot of talk that the ECB might have to give more direct support to the governments,” Frances Hudson, who helps manage about $242 billion as a global strategist at Standard Life Investments in Edinburgh, said in a Dec. 22 telephone interview.

Following is a table of bond and bill redemptions and interest payments in 2012 for the Group of Seven countries, Brazil, China, India and Russia, in dollars, using data calculated by Bloomberg as of Dec. 29:

Country 2012 Bond, Bill Redemptions ($) Coupon Payments Japan 3,000 billion 117 billion U.S. 2,783 billion 212 billion Italy 428 billion 72 billion France 367 billion 54 billion Germany 285 billion 45 billion Canada 221 billion 14 billion Brazil 169 billion 31 billion U.K. 165 billion 67 billion China 121 billion 41 billion India 57 billion 39 billion Russia 13 billion 9 billion

To contact the reporters on this story: Keith Jenkins in London at; Anchalee Worrachate in London at

Brophy Monday 02 January 2012 - 9:53 pm | | Brophy Blog

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