Global Threat of War Debts as G7 Borrowing Spirals Out of Control
By Alex Brummer for the Daily Mail
Updated: 22:04 BST, 16 October 2023
The recent deployment of US warships in the eastern Mediterranean and Britain’s decision to send military resources to the region reflects concerns of a potential broader conflict. While the focus has primarily been on the atrocities committed by Hamas and the resulting civilian exodus from northern Gaza, the larger geopolitical risk lies on Israel’s frontier, where Hezbollah terrorists armed with advanced Iranian technology pose a significant threat.
The increasing possibility of a wider war in this region has raised concerns about the need for greater defence spending by countries such as the US, Britain, and others who view this area as strategically important. However, the timing couldn’t be more challenging for most Western governments.
Over the past decade, the global economy has experienced three major shocks – the 2008-09 financial crisis, the Covid-19 pandemic, and Russia’s war on Ukraine. Consequently, G7 government borrowing and debt have skyrocketed to unprecedented levels, while central banks’ efforts to combat inflation have led to a surge in debt service payments.
This fiscal strain has primarily contributed to a sell-off in bonds, causing yields to rise. In the US, the budget deficit for the 2022-23 fiscal year reached $1.7 trillion, with estimates suggesting it could surpass $2 trillion when factoring in efforts to cancel student loans. Both the US and Britain now have debt levels approaching 100% of their national output, joining Italy and Japan in this undesirable position. Even Germany, known for its economic strength, has a debt-to-GDP ratio of 60%, which is predicted to increase due to recession and higher interest payments on its debt.
Since the start of the Russian invasion of Ukraine, the Biden administration, supported by Congress, has pledged $75 billion in defence and economic assistance to Kyiv. However, Republicans are beginning to oppose this spending, as they fear it will place an additional burden on the US budget and global economy. A second major conflict in the Middle East is the last thing the world needs.
Despite these looming geopolitical and economic risks, there seems to be a sense of complacency at the recent IMF/World Bank meetings in Marrakech. A survey by JP Morgan reveals that key officials and bankers are not sufficiently concerned about the surging debt interest payments that lie ahead.
In the US, the cost of debt service is expected to rise from 2.6% of GDP in 2023 to 3.6% by 2033 and double that in 2053. Britain, in particular, faces even more concerning trends, exacerbated by Treasury’s reliance on index-linked bonds. German interest rate costs have also surged tenfold in the past two years.
In light of these challenges and the potential need for increased defence spending, Chancellor Jeremy Hunt’s resistance to immediate tax cuts in the upcoming Autumn Statement remains crucial. Hunt must acknowledge that doubling the number of middle-income individuals paying higher rate taxes, from 2020 to 2027-28, would disincentivize work and further worsen the UK’s productivity issues. Maintaining tax thresholds is essential to avoid self-inflicted harm.
Musical Chairs
As an early investor in the Hipgnosis Song Fund, it is disheartening to witness disappearing revenues. Concerns about breaching loan agreements led to the fund cancelling its dividend, resulting in a decline in shares. This unfortunate turn of events coincides with founder Merck Mercuriadis attempting to reduce debt by selling off key assets to a Blackstone fund, also managed by Hipgnosis’ boss, in what appears to be a clear conflict of interest.
Major shareholder Tom Treanor of Asset Value Investors opposes this deal and wants to see it cancelled at a special meeting on October 26. He also suggests that voting against the fund’s continuation would allow shareholders to regain control and push for a new board and reorganization, rather than dissolving the fund altogether.
Regardless of the outcome, the inaction of the board of directors, especially chairman Andrew Sutch, is a letdown to investors. Ineffective independent chairmen, such as Sutch, are becoming increasingly common in the corporate world.
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