Markets and governments face an uphill struggle to fund themselves next year amid extreme uncertainty over the euro zone and the global economy, as new figures reveal that the borrowing of industrialized governments has surged beyond $10-trillion this year and is forecast to grow further in 2012.
The Organization for Economic Co-operation and Development, which represents the leading industrialized nations, will warn in its latest borrowing outlook, due to be published this month, that financial stresses are likely to continue with the "animal spirits" of the markets – their unpredictable nature – a threat to the stability of many governments that need to refinance debt.
Hans Blommestein, head of public debt management at the OECD, said: "[On occasion] market events seem to reflect situations whereby animal spirits dominate market dynamics, thereby pushing up sovereign borrowing rates with serious consequences for the sustainability of sovereign debt."
For the foreseeable future it will be a "great challenge" for a wide range of OECD countries to raise large volumes in the private markets, with so-called rollover risk a big problem for the stability of many governments and economies.
Rollover risk is the threat of a country not being able to refinance or rollover its debt, forcing it either to turn to the European Central Bank in the case of euro zone countries or to seek emergency bail-outs, which happened to Greece, Ireland and Portugal. The OECD says the gross borrowing needs of OECD governments is expected to reach $10.4-trillion in 2011 and will increase to $10.5-trillion next year – a $1-trillion increase on 2007 and almost twice as much as in 2005. This highlights the risks for even the most advanced economies that in many cases, such as Italy and Spain, are close to being shut out of the private markets.
While borrowing was higher in 2009 and 2010, the risks are greater than ever because of rising borrowing costs in turbulent, unpredictable markets.
The OECD says that the share of short-term debt issuance in the OECD area remains at 44 per cent, much higher than before the global financial crisis in 2007. This, according to some investors, is a problem as it means governments have to refinance, sometimes as often as every month, rather than being able to lock in more debt for the longer term that helps stabilize public finances.
The OECD also warns that a big problem is the loss of the so-called risk-free status of many sovereigns, such as Italy and Spain, and possibly even France and Austria. The latter two have triple A credit ratings but investors no longer consider them risk-free.