ALEX BRUMMER: Global war debt threat as G7 borrowing spirals out of control
The buildup of American warships in the eastern Mediterranean and Britain’s decision to send surveillance aircraft and other military resources to the region reflect concerns about a major conflagration.
The focus has rightly been on the horrific atrocities committed by Hamas and the exodus of civilians from the northern Gaza Strip.
The greater geopolitical risk lies on the Israeli border, where Hezbollah terrorists operating in Lebanon and Syria are armed with sophisticated missiles based on laser-guided Iranian technology.
The threat of a major war and the need for the United States, Britain and others to increase defense spending in a region of strategic importance is likely to grow.
For most Western governments, the timing couldn’t be more difficult.
On call: The buildup of American and British warships and military resources in the eastern Mediterranean reflects fears of a major conflagration
The impact of three shocks – the Great Financial Crisis of 2008-09, Covid-19 and Russia’s war on Ukraine – have catapulted G7 borrowing and debt levels into the stratosphere.
This comes at a time when central banks’ delayed efforts to curb inflation are leading to a rise in debt service payments.
Fiscal tensions, which are driving up yields, are primarily responsible for the bond sell-off. In the USA, the budget deficit climbed to 1.7 trillion US dollars in the just ended 2022/23 financial year.
When the impact of efforts to cancel student loans is included, the number is estimated at nearly $2 trillion.
Both the US and the UK now have debt levels approaching 100 percent of national production, joining the unfortunate G7 club of Italy and Japan, where debt levels are far higher.
Even Germany has a debt ratio of 60 percent, which is likely to rise given the recession and higher debt interest payments.
Since Russia’s invasion of Ukraine began, the Biden White House, with support from Congress, has allocated $75 billion for defense and economic support to Kyiv.
Republicans on Capitol Hill (fueled by Donald Trump’s antics) are beginning to balk at the bill. The last thing the US budget or the global economy needs is a second major front in the Middle East.
Despite the geopolitical dangers, there seemed to be a certain complacency at the IMF and World Bank meetings in Marrakesh. This view is confirmed by a JP Morgan survey of key officials and bankers.
Debt interest payments are increasing. In the US, debt service costs are expected to rise from 2.6 percent of output in 2023 to 3.6 percent in 2033 and double that in 2053.
In the UK the trend is even more worrying. The situation was made worse by the Treasury’s rush to index-linked bonds. German interest costs have risen tenfold to £35 billion in the last two years.
All this, and the possibility of having to spend ever more on defense, makes Chancellor Jeremy Hunt’s efforts to withstand the Conservatives’ immediate demands for tax cuts in next month’s autumn statement seem necessary.
Hunt should not forget that doubling the number of middle Brits paying higher taxes to 8.9 million between 2020 and 2027/28 is a huge incentive to work and can only worsen the UK’s declining productivity. Freezing tax thresholds is an act of self-harm.
Trip to Jerusalem
As an early small investor in the Hipgnosis Song Fund, you have to be disappointed by declining income.
Concerns about a breach of loan covenants led the fund to scrap its dividend, sending shares plummeting.
This comes at a time when founder Merck Mercuriadis is trying to reduce its debt by selling a bundle of key assets to a Blackstone fund also managed by the Hipgnosis boss, posing a clear conflict of interest. Songbooks for sale include rights to Kaiser Chiefs, Shakira and Barry Manilow.
Major shareholder Tom Treanor of Asset Value Investors is in turmoil and wants a “terrible” deal with Blackstone to be scrapped at a special meeting on October 26.
Less clear is Treanor’s suggestion that a vote against “continuing” the fund would simply hand control back to shareholders, who could then push for a new board and reorganization rather than liquidating the fund.
Whatever the case, a board led by corporate lawyer Andrew Sutch failed investors by allowing Mercuriadi’s infectious enthusiasm to run rampant.
Sutch joins a growing list of ineffective independent chairs.