Sovereign debt: positive outlook for the USA, Greece and Sweden

Sovereign debt: positive outlook for the USA, Greece and Sweden

Investors looking at sovereign debt should keep an eye on countries that have reduced their debt. A complete success for Greece, which is talking about the possibility of reclassifying its debts, for Sweden, which has learned the lessons of the previous crisis, and for the United States.

11/16/2023

Credit market and public debt to GDP ratio

Many countries’ policies aim to reduce the debt-to-GDP ratio. It has always been a go-to indicator for investors who want to evaluate credit strength, and it’s even more so today following the stunning increase in interest rates – which has not happened for a long time – and which is expected to remain stable for next year as well. This, according to Caspar Hines, senior portfolio manager at RBC BlueBay, is a fundamental shift after a long period in which low refinancing rates encouraged countries to increase leverage. Now the opposite is true. RBC BlueBay explains that Haines, as a sovereign debt investor, is in Find countries that are successfully managing debt reductionUsing the ratio of total debt to GDP as one of the main criteria for evaluating the financial situation.

The expert’s attention focuses, in particular, on the efforts made by the United States, Greece and Sweden, which have been rewarded in managing their public debt.

Greece: success story, potential increase in rankings

Greece stands out in this analysis, as one of the most successful cases in the past decade, which implemented a massive debt reduction process. Its negotiable debts (net EU loans) It fell to only 90%, while in 2020 alone it was 40 percentage points higher. Haines expects this trend to continue, and estimates that debt levels will fall by another 20 points. Within six months, The bank assumes that Greek debt will be reclassified to investment grade, and when that happens, passive funds could buy up to $20 billion of it. This represents nearly a quarter of Greece’s total marketable debt, which is believed to lead to a significant narrowing of the spread of Greek bonds against German bonds. DynamicsHe adds, It should also be facilitated by the country’s overall economic and political framework.

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In particular, in Greece the green transition is going well: This summer, solar energy was the country’s only source of electricity for more than a month. Moreover, the current center-right government was re-elected in June, confirming this ruling Greece will continue to work to reduce its debt in the coming years.

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Sweden: Learning the lessons of the previous crisis

Sweden, drawing on lessons learned during the housing and debt crisis of the 1990s, entered this crisis with very low public debt (total debt at 30%). Positive dynamics also for the private sector – Using significant financial leverage – Which Its total debt ratio saw a rapid decline from 180% to 160% in less than a year. The RBC BlueBay expert notes that total exposure levels have dropped from 300% to 275% currently. The country has also been able to move forward in this direction without much difficulty. This is largely due to higher net assets: Although real estate assets are completely illiquid, companies and even families had enough assets in stock markets and other liquid assets to help pay off their debts.

We should not forget that the real situation in Sweden may be better than it appears from the debt-to-GDP ratio. Household debt represents only 85% of GDP, a value that is largely manageable. Although corporate debt is higher, companies have a global footprintTherefore, they do not have as high an influence as the relationship with Swedish GDP suggests.

USA: Good, but there is a rapidly increasing debt dilemma

For any country, debt reduction is a positive commitment, but at the same time it can lead to big changes: this is precisely where hard and soft landings come into play – and rightly so. This logic, according to Hanes, This applies to the United States, which is currently engaged in a debt reduction process. This is certainly positive, as it is today The United States holds the bulk of its own debt, while the shares in the hands of foreign entities have declined in the past five years from 40% to 30%. Futures rates are rising rapidly, but from very low levels, so we are generally still in a soft landing phase. But in the United States there is a big problem: the rapid increase in public debt. In detail, there is a budget deficit of 8%, and total levels of public debt will rise in the future from 120% to 150%.

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Even the head of the Federal Reserve said the situation was unsustainable. To accommodate new Treasury issuance in coming years, households should review their savings allocation by reducing cash and equity investments. Meanwhile, Moody’s lowered its outlook for the US to “negative”, although it confirmed its AAA rating.

by: Fernando Mancini

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