18 trillion reasons why financial market volatility may not stay low for long

Jack Taylor/Getty Images
  • According to OECD estimates, sovereign debt issued by its 34 members has increased from $US25 trillion to $US45 trillion since the GFC. That does not include debt owed by the private sector or other government bodies.
  • Around 40% of that sovereign debt pile will need to be refinanced by the end of 2020.
  • With monetary policy tightening around the world, and less synchronised global growth, ANZ Bank warns this could create headwinds for economic growth and lead to more frequent bouts of financial market volatility.

Global debt levels have increased rapidly in the decade since the GFC, with a fair share of it required to be refinanced over the next few years.

At a time when monetary policy is gradually being tightened, and with global economic growth less synchronised that it was last year, that means the risk of more frequent and larger bouts of financial market volatility look set to increase in the period ahead, says economists at ANZ Bank.

It points to a staggering estimate from the OECD — comprising 34 major industrial nations including the United States, United Kingdom, Germany and Australia — to underline why the risks are growing.

“The OECD estimates that the stock of sovereign debt in OECD economies rose from $US25 trillion in 2008 to $US45 trillion this year and that the average debt to GDP ratio across the OECD area is now 73% of GDP. It also estimates that 40% of the OECD sovereign debt stock needs to be refinanced between 2018 and 2020,” it says.

“In an environment where monetary policy is gradually becoming less accommodative, maintaining confidence is critical.”


Indeed confidence will be crucial.

Based on OECD estimates, around $US18 trillion in sovereign debt, not including that owed by the private sector and other government bodies, will need to be rolled over in the next two years.

In an environment where interest rate are starting to lift around the world, it clearly poses a challenge.

“Whether financial markets will continue to perform as well in the future as they have in the past is an open question, especially as the support from quantitative easing (QE) will gradually wane,” ANZ says.

“Although QE is not debt monetisation, the purchase of trillions of dollars and euros of government debt has served to depress bond yields during what has been an environment of fiscal austerity, hence supporting risk assets.

“Those positive dynamics are changing.”

And while the global economy is looking significantly better than only a few years ago, led by a resurgence in the US, as ANZ points out, it’s taken a lot of fiscal firepower, and larger deficits, to get the US economy to its present position.

ANZ Bank

“Strong US growth is masking fiscal deterioration and the US budget deficit has risen by 33% year-on-year in the first 11 months of this financial year,” the bank says, adding that “budget deterioration is now a common feature of governments elected with populist voting biases”.

One only has to look at recent events in Italy to underline that point.

Unless the fiscal juice being applied leads to an increase in productivity growth, ANZ warns that higher government debt and deficits clearly pose a risk to future growth.

“Against a backdrop of diminishing QE and expectations of more restrictive US monetary policy, the potential for shadows to be cast over growth are rising,” it says.

“More frequent bouts of financial market weakness cannot be ruled out.”

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