INTHEBLACK October 2021 - Magazine - Page 37
Left: Protesters take to
the streets of Buenos
Aires, Argentina, in
rejection of a US$230
million (A$317 million)
payment made in July this
year to the 22 creditor
countries that form the
Paris Club, to prevent the
nation falling into default.
Above: A deserted fish
market in the Senegalese
city of Rufisque. The
World Bank has recently
issued calls for debt relief
for the region, warning
that sub-Saharan Africa
could fall into its first
recession in 25 years
due to the pandemic.
“Risks to our base case include disorderly
reflation, a spike in policy rates or even wider
credit spreads, the spread of harder-hitting
COVID-19 strains, poor vaccine take-ups, and
consumption demand rebounding less than we
expect as a result of structural shifts.”
Chan says that S&P expects policy rates
to remain low, but creditors fearing inflation
or reacting to an unexpected adverse event
could reset risk-return expectations, resulting
in higher debt servicing costs and reduced
accessibility to funding.
“A normalisation of interest rates owing
to a strong COVID-19 recovery is natural.
That said, the speed and volatility of the path
towards normalisation is more of a concern.”
MANAGEABLE DEBT FOR NOW
Saul Eslake, independent economist and
vice-chancellor’s fellow at the University of
Tasmania, says that, as a general observation,
there could be an extended period where the
interest rate on public debt is less than the
growth rate of the economy.
“NATURALLY, THE
SHAPE OF THE
POST-PANDEMIC
RECOVERY WILL
FACTOR INTO
HOW MUCH AND
HOW QUICKLY
CORPORATES,
GOVERNMENTS
AND
HOUSEHOLDS
CAN TRIM DEBT,
IF AT ALL.”
TERENCE CHAN CPA, S&P
“Hence governments will probably be able to
sustain their current debt levels for a lot longer
than you might have thought possible a decade
ago, when interest rates were a lot higher,”
Eslake says.
“There just seems to be a different consensus
now, importantly among leaders as well as
among others, as to what the likely range of
interest rates in the future is going to be.
“There are probably more things to worry
about than the level of public debt. In some
countries, and Australia might be one of them,
the very high level of private debt acts as a
constraint on how much the central bank can
raise policy interest rates in order to contain
any eventual inflationary threat.
“In turn, this kind of reduces the pressure on
governments to reduce their debt.”
Eslake says that, during the GFC, there were
more dire predictions made about possible
consequences from the debt governments
took on to rescue banks and to provide broad
monetary support to economies.
“A lot of governments did rack up debt to
bail out banks and to dig their economies out
of holes. People made all sorts of dire forecasts
as to what they might mean, most of which
didn’t come true.
“There were also people who made all
sorts of dire forecasts about inflation as a
consequence of quantitative easing, which
also haven’t come true.
“This shouldn’t be a licence for governments
to borrow wilfully and throw cash around as
if there was no limit on it. But I’m just saying,
it wouldn’t be top of my list of things to worry
about.”
Eslake says that even though debt has risen
considerably, “it’s not quite the compelling
concern that it would have been if all of the
other parameters around debt hadn’t changed
as much as they have over the last decade, in
particular as a result of COVID-19”.
intheblack.com October 2021 37