The sovereign issuer-based default rate rose to a record high in 2020 against a backdrop of weakened sovereign credit profiles due to the Covid-19 pandemic, Fitch Ratings says. Downgrade pressures have eased this year, but our ratings indicate that more defaults are possible.
Fitch’s recent Sovereign 2020 Transition and Default Study shows that five Fitch-rated sovereigns defaulted in 2020, up from only one in the previous year. As a result, the sovereign default rate rose more than threefold to 4.2% from 0.9% in 2019. The previous high was 1.8% in both 2016 and 2017.
Since the 1990s, Italian leaders have tried to overhaul the sclerotic economy while also running tight budgets. Mr. Draghi is the first in decades who can deploy massive fiscal firepower to help.
Italy’s economy has rarely grown by more than 1% annually over the past quarter-century. The economy has never fully recovered from the global financial crisis and subsequent eurozone crisis, and slumped by another 9% in 2020 amid the pandemic and strict lockdowns.
Germany, France and other EU countries backed the recovery fund mainly for fear that Italy and Southern Europe could get stuck in another deep economic slump that once again tests the cohesion and survival of the eurozone.
Most of Greece’s debt is in bailout loans from the rest of the eurozone, with no repayments due for many years, making another Greek debt crisis unlikely for a long time.
At the start of 2020, the ratio of debt to gross domestic product surpassed 107 percent in the US — before any pandemic spending. In other words, our government debt now exceeds the total annual production of our economy.
The decline in Americans’ trust in government is roughly correlated with the rise in public debt over the same time frame (although data analysis can’t control for all the factors necessary to prove the point). In the mid-’60s, about 75 percent of people in the US said they trusted the government always or most of the time; by 2019 that number was down to 17 percent.
To hear it from liberal economists, progressive activists and Democratic politicians, there is no longer any limit to how much money government can borrow and spend and print.
In this new economy, we no longer have to worry that stock prices might climb so high, or companies take on so much debt, that a financial crisis might ensue. In this world without trade-offs, we can shut down the fossil fuel industry and transition to a zero-carbon economy without any risk to employment and economic growth. Nor is there any amount of infrastructure investment that could possibly exceed the capacity of the construction industry to absorb it.
Rest assured that the economy won’t miss a beat no matter how far or fast the minimum wage is raised. And whatever benefits are required by the always struggling middle class can be financed by raising taxes on big corporations and the undeserving rich.
Italy is making its first foray into the green bond market, the latest major debt issuer to tap into one of the fastest-growing sectors of finance.
The nation is selling debt maturing in 2045 via banks, an unusual tenor that is expected to draw interest from domestic investors as well as specialist environmental funds. European nations are piling into the market as they seek to finance a greener recovery from the pandemic.
When economists like Larry Summers and Olivier Blanchard, who normally support more spending, balked at the size of the Biden stimulus plan, supporters of the plan said there was no reason to worry. Clearly markets are not worried about inflation or sustainable debt, just look at low bond prices and modest inflation expectations. They argue if markets aren’t worried, maybe none of us should be.
But we are in uncharted territory. The Debt-to-GDP ratio grew exponentially last year to once unthinkable levels, at least for a time of without a major military conflict.1 Piling on another $1.9 trillion (and possibly more later this year) risks higher rates in the future. The more leverage you carry, the less room you have to spend on the next disaster.
So why aren’t markets more worried? Perhaps because for the time being there are not better, safer alternatives. Also, the government has a captive buyer of its debt in the Federal Reserve, whose holdings of US government debt also reached unprecedented levels last year. Debt enthusiasts dismiss worries of an overheating economy by pointing out the Fed could raise rates and stop inflation if it takes off. But that would involve the Fed selling some of its debt and putting even more bonds on the markets, only this time there won’t be a single captive buyer.
Absent that nightmare scenario—and most prognosticators believe science can vanquish any of COVID-19’s shape-shifting—the conventional Wall Street wisdom is for better days ahead on both the health and the economics fronts. And since escalating rates are co-dependent on an improving economy, a sunny thesis appears pretty solid.
Historically speaking, low rates like today’s are an aberration. Thus, at some point, it’s reasonable to assume they will return to normal. Or at least to higher than now, to a degree. A new normal that’s hardly towering.
The US is running up debt like never before, and one of the reasons Washington can get away with it is because interest rates are hovering around their lowest levels ever. This raises the question—should the Treasury lock in these rates for 50 years? How about a century?
Government borrowing is under renewed scrutiny as politicians consider their third mega-spending package to support the US economy, adding to more than $3 trillion already earmarked since the onset of the Covid-19 pandemic. Federal debt owned by the public is expected to ramp up from 81% of GDP this year to nearly 100% in 2030, the highest ratio since 1946, according to Congressional Budget Office (CBO) projections in December. That ratio could hit 180% by 2050, by far the highest debt burden the US has ever had.
Debt levels are high, but the government’s borrowing cost is low. In March, 10-year Treasury bond yields fell below 1% for the first time and they’ve only ticked up modestly since, rising to about 1.1%. That helps explain why the US has amassed so much debt and, yet, is spending less on interest expense than it did in the 1980s and 1990s. The worry is that the unprecedented mountain of debt could have to be refinanced at higher yields down the road.
Some New York lawmakers are planning legislation designed to blunt hedge funds’ ability to resist sovereign-debt restructurings, while easing financial settlements for government borrowers in distress.
New York state Sen. Gustavo Rivera and Assemblywoman Maritza Davila, both Democrats, plan to introduce legislation as soon as this week to allow a supermajority of a nation’s creditors to amend or restructure its debt contracts and bind any dissenters that could otherwise hold out.
Many sovereign bonds in Latin America, Africa, and other emerging markets contain collective-action clauses that require all creditors to honor agreements that a majority of them make with the borrower. But others lack such mechanisms, leaving no ready way for settlements made with majority support to become binding on all members of a creditor class.
A risk of the legislation is that investors would sue to challenge it because it could retroactively change certain contracts already in place. Changing contract rights can be justified under certain circumstances, if doing so advances a compelling state interest.