The global interest bill is about to jump

2/3/2022 2:18:00 PM

With decisions due from the Bank of England and the European Central Bank, we explain who is most exposed

With decisions due from the Bank of England and the European Central Bank, we explain who is most exposed

The world paid $10trn in interest last year. As rates begin to rise, we calculate who is most exposed to the squeeze

. Those in some emerging economies have been raising interest rates for some time already; Brazil’s central bank is expected to raise rates by 1.5 percentage points after a meeting on February 2nd, its third consecutive such increase. The Bank of England is likely to deliver its second interest-rate rise a day later. The central bank with the most influence on global capital flows—the Fed—has signalled that it will probably put rates up as soon as March, and investors expect four further quarter-percentage-point increases this year. Real borrowing costs for governments are rising as well. In America the yield on the five-year Treasury inflation-protected security (TIPS), which hovered around -1.7% for much of 2021, now stands at -1.2%.

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Those in some emerging economies have been raising interest rates for some time already; Brazil’s central bank is expected to raise rates by 1.5 percentage points after a meeting on February 2nd, its third consecutive such increase. "Anything over a 30% rise in April would make me leave this flat. The Bank of England is likely to deliver its second interest-rate rise a day later. In contrast, the commission would allow gas plants emitting 270g CO2e/kWh to be classed as “sustainable” until 2030. The central bank with the most influence on global capital flows—the Fed—has signalled that it will probably put rates up as soon as March, and investors expect four further quarter-percentage-point increases this year. He said he was "very anxious" about the rise, and expected it to be a "big challenge". Real borrowing costs for governments are rising as well. But his pals could see he was panicking, and one of them - only identified as C in the hearing - courageously jumped in after him in a bid to save him.

In America the yield on the five-year Treasury inflation-protected security (TIPS), which hovered around -1. This is then translated into the expected annual bill for a household that uses the typical amount of gas and electricity. The EU taxonomy became law in July 2020, but legislators left important details to be resolved through so-called delegated acts – secondary legislation meant for technical issues that is not subject to the same degree of ministerial and parliamentary oversight.7% for much of 2021, now stands at -1.2%. That does not mean there is a limit to how much people can pay. The scale of the global interest bill is vast. Commission officials played down the threat of a legal challenge from Austria and Luxembourg, describing it as “a very theoretical discussion”. The Economist estimates that households, companies, financial firms and governments worldwide paid around $10. What's the energy price cap and why is it going up? Anyone who is on a standard variable tariff, whose fixed deal has come to an end (or is about to), and those moved because their old supplier went bust will be affected by the new higher cap.

2trn in interest costs in 2021, equivalent to 12% of GDP . How much could it rise by as rates rise, and which borrowers are likely to be squeezed the most? To answer these questions, we examined data on the borrowing of companies, households, financial firms and governments for 58 countries.5 million people on prepayment meters. Yet France, backed by central and eastern European member states, lobbied Von der Leyen to include gas and nuclear, which they consider as a bridge to the EU’s net zero future. Across both the emerging and the rich world, some borrowers may be more strained than others. Working out the effect of rate rises on the interest bill is not straightforward. Energy firms are struggling under the weight of surging wholesale gas prices. Some debt is tied to a fixed interest rate, such that higher borrowing costs are passed through only when it is rolled over. If, for example, Poland would like to replace a coal plant with several small gas plants, this should be possible if it helps achieve climate neutrality”, Esther de Lange, a Dutch Christian Democrat, said.

The median maturity of government debt, for instance, is five years. Media caption, Why are UK energy prices so high? Joe Malinowski, founder of energy price comparison website The Energy Shop, said: "The energy price cap has already bankrupted over half of all energy suppliers in the market. Companies tend to borrow for a two-year term; households typically borrow over a longer period. Incomes change over time, affecting borrowers’ ability to afford debt payments. "Come 1 April, energy households up and down the country are set to get battered by colossal increases in energy bills. Nuclear makes the EU’s energy transition more costly than it needs to be. Borrowers could respond to higher interest costs by paying off debt, so lowering their debt-interest costs. But in aggregate, according to research by the Bank for International Settlements (BIS), a club of central banks, higher rates weaken private-sector debt-service ratios." However, ministers are expected to announce a package of measures to reduce the immediate impact on households.

The higher the level of debt, the bigger the effect, suggesting that the economy has only become more sensitive to rate rises. Opponents in national capitals, however, say the commission had no obligation to include gas or nuclear. To illustrate the potential scale of the increase, we consider a scenario where the interest rates faced by firms, households and governments rise by a percentage point over the next three years. But it has raised concerns among providers because the money would still have to be paid back eventually by billpayers. (By way of comparison, the five-year Treasury yield has risen by a percentage point since spring 2021.) We assume that this feeds through over the course of five years to government and household debt, and over two years to company borrowing. Shell's earnings reached $19. We also assume that nominal incomes rise in line with the IMF’s forecasts.

As the fund’s projections assume that public debt rises at broadly similar rates, we let debt-to-GDP ratios stay flat.2bn) in 2021, about four times the level recorded a year earlier. This implies annual budget deficits of around 5% of GDP—narrower than in the years immediately preceding the pandemic. In such a scenario, the interest bill would exceed $16trn by 2026, equivalent to 15% of projected GDP in that year. "Our plan, part paid for with a one-off windfall tax on North Sea oil and gas profits, would save most households £200 off their bills, with targeted support of up to £400 on top of that to the squeezed middle, pensioners and the lowest earners. And if rates were to rise twice as quickly, say because inflation persists and forces central banks to take drastic action, the interest bill could rise to about $20trn by 2026, nearly a fifth of GDP. The burden would not fall on all borrowers equally. He told the BBC's Today programme: "It looks to be quite a complex and perhaps a slightly rushed proposal in that there's all sorts of open questions around what happens if a customer leaves you and you have borrowed money to smooth their bill? "What happens if a customer is already on a low tariff? Do we cut that even lower?" Meanwhile, the managing director of supermarket chain Iceland, Richard Walker, said he was concerned that "bricks and mortar" retailers and businesses were "going to bear the brunt" of rising energy prices.

Private-sector borrowers in a country tend to foot a much bigger share of the bill than the government, which can borrow more cheaply, for instance. Financial firms receive as well as pay interest. "We are talking about energy prices and costs directly affecting consumers but that is also going to have a huge knock on effect for businesses too. The more exposed the borrower is to rate rises, in terms of higher debt levels, the bigger the interest bill they face, and the more likely it becomes that they cut back spending in order to meet their higher debt costs, or, in more extreme cases, that they fall into distress. To see which borrowers may be more sensitive to interest-rate rises, we rank the household, corporate and government sectors for our countries along two dimensions (for this exercise we exclude the financial sector, which intermediates lending)." INFLATION:. The first measure is the debt-to-income ratio, which gauges the extent to which debt is affordable.

The second is the change in the ratio over the past decade, which captures the extent to which exposure to interest rates has increased over time. We then produce an overall score for each sector in each country (see table). Start with governments. Lebanon, which already defaulted on some of its debt at the start of the pandemic, tops the list, with an interest bill of nearly half its revenues. Despite being a big exporter of oil, Nigeria’s paltry revenues only just cover its interest costs.

Fortunately, most borrowing by emerging-market governments during the pandemic has been in their own currencies, notes Emre Tiftik of the Institute of International Finance, a bankers’ group, which may make them less exposed to flighty foreign capital. Our next group of borrowers comprises households. South Korea, Norway and Switzerland have the most debt, relative to household income, in our group of countries. Mortgage debt in Sweden is particularly sizeable. House prices rose by 11% in 2021, and well over half of mortgage lending is done with variable interest rates.

When rates rise, therefore, mortgage bills follow suit. Debt-to-income ratios have more than doubled in China and Russia. Companies are the third set of borrowers. Those in France and Switzerland have the most debt as a share of gross operating profit, leaving them exposed to rate rises. Among emerging markets, Chinese and Russian firms are also weighed down by their bills.

Overall, our findings for the private sector are broadly consistent with an early indicator of financial stress, the credit-to-GDP gap, calculated by the BIS, which measures the degree to which borrowing exceeds its long-run trend. On this measure, the Swiss and South Korean private sectors rank among the five most indebted in the world. Our rankings help illustrate who is most exposed to rising interest rates. But they cannot predict which sectors or economies will experience trouble as interest rates rise. That is a far more complex picture, which depends among other things on the prospects for growth and the reaction of policymakers.

Strains in one part of the economy could interact with those in others, say by weakening the banking system. Picking up the tab Although households in rich countries are highly indebted, the interest rates they face are still low in historical terms. Debt levels in Argentina, by contrast, may not look particularly high, but eye-watering interest rates, of 35% for the private sector, mean that borrowers are experiencing an intense squeeze. Places with gloomy growth prospects will struggle. Rapid rate rises in America could hamper their recoveries, says Gene Frieda of PIMCO, a bond-fund manager.

Incomes may not rise fast enough to meet interest costs. China faces a combination of threats: the property market has deflated as Evergrande, a large and heavily indebted developer, unravels. Banks have become saddled with bad household debt. But its policymakers have also responded to these risks. The resulting drag on economic growth partly explains why the People’s Bank of China is lowering interest rates, not raising them.

Policymakers in the rest of the world may be moving in the opposite direction, but the risks stemming from highly indebted borrowers, and their potential to drag down the economic recovery, will nonetheless be weighing on their minds. Correction (February 2nd): The figure for the total interest bill has been corrected, from $10.5trn to $10.2trn, equivalent to 12% of GDP . We have also edited the text in places to clarify that our ranking shows the exposure of various borrowers to interest-rate rises, rather than vulnerability.

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