What are the risks of government debt for savers?
Gov. bonds and Spread
Posted by MoneyController on 05.09.2024
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One of the issues that cyclically resurfaces in the financial debate is the sustainability of public debt. But what might be the consequences for savers? Sandra Riccio writes about this in ‘La Stampa’, taking up an analysis by Thomas Kasanin, Fixed Income Credit Analyst, and Ivan Morozov, Sovereign Analyst, at T. Rowe Price.
The sustainability of government debt primarily affects a state's debt securities: the lower the sustainability, the higher the interest typically required to underwrite it, as well as the risk of not having it repaid. Although in most European countries this scenario is remote or very remote, it cannot be ruled out a priori.
However, the two analysts at T. Rowe Price are not talking about defaults, but rather about policies to manage government debt. They therefore deal with a number of scenarios, some characterised by inflation, others by disinflation. In any case, changes in monetary and fiscal policy tend to affect the yield curve of government bonds: usually, a cut in rates means that government bonds in circulation tend to appreciate (as they distribute higher coupons on average); if rates rise, bonds in circulation tend to see their value fall, as an effect of the presence on the market of bonds that distribute higher coupons on average.
As can be seen from the two experts' analysis, not only the amount of debt to GDP is a relevant aspect, but also the growth rate: if a country grows at a slower rate, it will find it more difficult to pay interest on its debt, but it will also be forced to subscribe to new debt securities at high rates on average, in order to finance its assets (or even to pay interest on its debt).
The two analysts at T. Rowe Price identify a number of strategies implemented by states as possible ways to manage debt, and with which savers might also have to deal: for example, fiscal consolidation (i.e. deficit reduction), financial repression (i.e. a restriction of credit disbursements), or even inflation (which decreases the value of debt in perspective).
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