IMF urges advanced economies to cut debt as yields spike

The International Monetary Fund on Wednesday, Oct. 14, Bangkok time, called on advanced economies to "act now" to cut deficits and debt. It warned that rising sovereign bond yields are leaving governments less time to delay. The Fund said average public debt is about to reach 100% of global GDP, the highest level since World War Two.rmb.reuters+1

The message came at the IMF and World Bank annual meetings in Bangkok. "The fiscal results this year are worse than expected six months ago, and worse than they were one year ago," Rodrigo Valdes, head of the IMF's Fiscal Affairs Department, told Reuters. He added that most countries are now planning to spend more rather than less.money.usnews

Borrowing costs climb

According to the IMF, the Group of Seven's average 10-year government bond yield rose more than 110 basis points between February and September and reached its highest level in nearly two decades. AFP reported that on Tuesday, U.S. 10- and 30-year Treasury yields were at their highest since around 2002. The Fund pointed to several causes: high oil prices tied to the Iran war, persistent inflation, stronger investment demand and faster-than-expected growth in artificial intelligence.freemalaysiatoday+1

The IMF projects the effective average cost of government financing will rise from 2.3% in 2021 to 3.7% by 2031. It said U.S. interest payments, which were about 2.8% of GDP before the pandemic, will grow to roughly what the country is projected to spend on Social Security. In low-income countries, interest already takes more than 15% of tax revenues, compared with about 9% on average between 2011 and 2019.money.usnews+1

Shorter debt maturities are making the problem worse. For the G7 and Spain, nearly 30% of debt now matures within a year, so higher rates feed into government costs more quickly. "If short-term interest rates change — so say monetary policy tightens — that can quickly spill over into government borrowing costs," Era Dabla-Norris, deputy director of the Fiscal Affairs Department, told AFP.freemalaysiatoday+1

Warnings across the week

The fiscal warning came a day after the IMF's Global Financial Stability Report said yields could rise in a "disorderly" way. That report pointed to large debt loads, heavy borrowing by AI companies and hedge funds' growing positions in Treasuries. The Fund said emerging markets have so far enjoyed favorable financing conditions, but that may not last. It urged low-income countries to strengthen their tax systems.cnbc+1

Dabla-Norris said governments must explain the trade-offs of consolidation to voters. "By not starting on the consolidation path today, you're just kicking the can down the road," she said. Valdes was more direct: "This is unfortunately like the gravity law. There's no way out of the fiscal dynamics here".money.usnews+1