Elevated Sovereign Debt Persists Amid Political Risks

Over the last two decades, one of the most pressing concerns has been the elevated level of sovereign debt across many developed and emerging markets. Governments around the world have significantly increased their borrowing, especially in response to external shocks such as the 2008 Financial Crisis and the COVID-19 pandemic, through unprecedented fiscal stimulus measures to support economies.

Conversely, both corporations and households have exercised caution, focusing on managing existing liabilities and maintaining liquidity rather than expanding through additional debt, which results in a decrease of private debt relative to GDP from 2007 highs, as illustrated in the US.

However, this balance between high sovereign debt and contained private debt is precarious, particularly in the context of rising political risks. For instance, in France, the political environment has become increasingly volatile. Recent elections have highlighted significant divides within the country, and these political uncertainties reduce the likelihood of substantial reforms aimed at reducing public spending and addressing the fiscal deficit, despite France’s already elevated social and public spending relative to peers. Moreover, for the current election, no party campaigned on a spending cut program, further diminishing prospects for fiscal austerity.

The situation in France is indicative of a broader trend where governments facing high political risks may find it challenging to implement austerity measures or reduce public expenditure, as such actions could further destabilise the political landscape and erode public support. 

During 2024, approximately half of the world’s population will participate in elections. As the US Presidential campaign currently demonstrates, there is little appetite for addressing elevated deficits and sovereign debt outstanding, which can be seen as the major weakness of the current economic cycle. While growth remains robust, the topic is not yet at the forefront, but this could change if the growth rate falters.

by Gilles Pradère

Senior Fixed Income Portfolio Manager

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