The gross borrowing needs of OECD governments are projected to increase slightly to around US$10.9 trillion in 2013, up from the already high level of US$10.8 trillion in 2012, according to a new OECD report.
The OECD Sovereign Borrowing Outlook 2013 expects that ratings agencies will continue to keep the pressure on governments in 2013. Given their poor track record of sovereign risk pricing over the past twenty years, the report suggests that any downgrades should be carefully scrutinised, and not taken at face value.
The general government deficit for the OECD area as a whole is estimated to have reached 5.5% of GDP in 2012, equivalent to around US$2.6 trillion. It is projected to decrease to 4.6% of GDP in 2013, equivalent to around US$2.3 trillion.
Government debt ratios for the OECD as a whole are expected to grow or remain at high levels during the coming year. General government debt-to-GDP is projected to reach 111.4% in 2013. The good news, according to the report, is that overall debt ratios are increasing much more slowly than in the past, declining from an increase of 11.5% in 2008-2009 to a projected 1.1% increase in 2013-2014.
Euro area-induced contagion effects in 2011 led to upward pressures on funding costs and roll-over risk for sovereigns, as well as a reduced ability by financial institutions’ to pledge sovereign securities as collateral and flight-to-safety by investors. However, the recently announced combined Outright Monetary Transactions and European Stability Mechanism backstop has had a noticeable downward influence on bond yields in peripheral markets.
In countries where public deficits and debt ratios have not begun to decline, the legacy of public debt exposes governments to shifts in confidence, complicating the implementation of issuance programmes by sovereigns.
Raising large volumes of funds at lowest cost to refinance their debt obligations will therefore remain a major challenge for many governments. Most OECD debt managers will continue rebalancing their portfolios by issuing more long-term bonds and cutting back on issuance of short-term bills.
Many countries are expected to see a relatively high level of longer-term redemptions in 2013. For the OECD area as a whole, governments will need to refinance around 30% of outstanding long-term debt in the next three years.
The OECD average long-term interest rate is expected to rise to around 4.0% in 2013, up from 3.8% in 2009.