World’s biggest economies face mammoth $7.6 trillion debt

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euro sovereign debt default crisis

Governments of the world’s leading economies are facing huge economic challenges this year with high rise in borrowing costs and a mammoth figure of around $7.6 trillion of debt maturing among many financial woes.

According to data compiled by Bloomberg, the Group of Seven (G7) nations and Brazil, Russia, India and China stands at $7.6 trillion which also includes Japan’s $3 trillion and the US’s $2.8. Forecasts also show that ten-year bond yields will be higher by year-end for at least seven of the eleven countries.

Surveys suggest investors may demand higher compensation for lending to countries that are struggling to finance increasing debt burdens amid global economic recession.The contagion of eurozone sovereign debt crisis, ballooning US budget deficit and cooling down of the Chinese economy has forced the International Monetary Fund to cut its growth forecast to 4 per cent from a prior estimate of 4.5 per cent.

Stuart Thomson, a money manager in Glasgow at Ignis Asset Management Ltd., which oversees $121 billion, insists ‘the weight of supply may be a concern’. Rather than the start of the year being the problem, its the middle part of the year that becomes the problem. Thats when we see the slowdown in the global economy having its biggest impact, he said in a telephone interview with Bloomberg.

HEATED COMPETITION

The amount needing to be refinanced, including interest payments, has risen to more than $8 trillion this year, partly due to the role played by credit rating agencies. Standard & Poor’s, world’s leading credit rating agency, already cut US’s coveted AAA to AA+ last year and warned 15 European nations of possible downgrades last year which resulted in a heated competition to find debt buyers.

It is a big number and obviously because many governments are still in a deficit situation the debt continues to accumulate and thats one of the biggest problems, Elwin de Groot, an economist at Rabobank Nederland in Utrecht, Netherlands, part of the worlds biggest agricultural lender, said in an interview.

The continuing erosion of US financial institutions will have a big impact on the ability of world’s biggest debtors financing their debt load this year.

Data compiled by Bloomberg shows that Italy managed to auction just 7 billion ($9.1 billion) on 29 December way less than its 8.5 billion target. Europe’s fourth largest economy sank into its fourth recession since 2001 at a time when Italian Prime Minister’s government faces a daunting task to refinance $428 billion of securities coming due this year, third most after Japan and the US, with another $70 billion in interest payments.

OUT OF CONTROL

Bloomberg’s financial surveys, based on economists and strategists’ forecasts of 10-year government bond yields, suggest borrowing costs for G7 nations will balloon to as much as 39 per cent in 2011. On the other hand, non G7 economic powers like China and India may witness little change or even a fall in 10-year yields.

Rising borrowing costs forced Greece, Ireland and Portugal to seek bailouts from the EU and the IMF last year. Troubled Italian economy’s 10-year yields exceeded 7 per cent last month forcing it to request aid from those three nations.

The buyer base for peripheral Europe has obviously shrunk at the same time that the supply coming to the market is increasing, which is not a good combination, said Michael Riddell, a London-based fund manager at M&G Investments, which oversees about $323 billion.

Italys sale last week included 2.5 billion ($3.25 billion) of 5 percent bond due in March 2022, which yielded 6.98 percent. That was down from 7.56 percent at an auction 29 November. It also sold 9 billion ($11.9 billion) of bills on 28 December at a rate of 3.251 percent, compared with 6.504 percent at the previous auction on 25 November.

Theres a lot of talk that the ECB might have to give more direct support to the governments, Frances Hudson, who helps manage about $242 billion as a global strategist at Standard Life Investments in Edinburgh, said in an interview with Bloomberg.

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