IMF Warns Rising Bond Yields Demand Urgent Fiscal Consolidation Worldwide
IMF Calls for Immediate Fiscal Action Amid Soaring Bond Yields
By Andrea Shalal
IMF's Urgent Warning on Fiscal Policy
BANGKOK, Oct 14 (Reuters) - The International Monetary Fund on Wednesday urged advanced economies and others to take urgent action to reduce government spending, cut deficits and reduce debt levels, warning that delays would only make the job harder in coming years.
Rodrigo Valdes, head of the IMF's Fiscal Affairs department, said rising sovereign bond yields were adding to fiscal pressures at a time when average public debt was poised to hit 100% of gross domestic product, the highest seen since World War Two, leaving countries with less margin for delay.
Worsening Fiscal Results and Delayed Adjustments
"The fiscal results this year are worse than expected six months ago, and worse than they were one year ago," Valdes told Reuters in an interview ahead of this week's meetings of the IMF and World Bank in Bangkok. The majority of countries were now looking at spending more instead of tightening their belts, he said.
Hammering home a central message from the IMF, Valdes said major advanced economies with high debt needed to build political support for concrete plans to contain borrowing costs in the medium term, and limit spillovers to the rest of the world.
Consequences of Delayed Fiscal Consolidation
"The more countries wait, the more painful the adjustment becomes," the IMF said in a blog released on Wednesday. Delaying adjustments would lead to increasing interest burdens and fiscal vulnerabilities, further narrowing policy options.
Impact on Emerging and Low-Income Economies
Financing conditions for many emerging market and developing economies had remained favorable, but might not last, the IMF said, urging those countries to also reduce their fiscal vulnerabilities and strengthen debt management.
Low-income countries, where external financing was already tighter, needed to strengthen their tax systems and improve spending efficiency, the IMF said.
Drivers of Rising Sovereign Yields
High oil prices, persistent inflation, stronger investment demand and higher-than-expected AI growth have driven sharp increases in long-term sovereign yields in recent months. The Group of Seven's average 10-year government bond yield rose over 110 basis points between February and September, reaching its highest level in nearly two decades, the IMF said.
Rising Costs and Fiscal Pressures
The IMF said the effective average cost of government financing was projected to rise to 3.7% by 2031 from 2.3% in 2021. In the US, interest payments were expected to reach 5.3% of GDP, up from 2.8% of GDP before the COVID pandemic, roughly equal to its projected expenditure on Social Security.
That number was even higher in low-income countries, where interest payments today consume over 15% of tax revenues, compared to an average cost of around 9% between 2011 and 2019.
Shorter Debt Maturities and Higher Rates
Adding to the stress, governments in advanced economies were refinancing more debt at shorter maturities, causing higher rates to pass through to government costs more quickly, the IMF said. For the G7 and Spain, it said, the share of debt maturing within one year was now approaching 30%.
Inflation, Energy Prices, and Policy Constraints
Inflation rates above target and higher energy prices meant central bankers would likely need to keep rates higher for longer, which in turn would limit governments' ability to respond to downturns, just as demands for increased spending on defense, energy security and aging populations were mounting.
Outlook and Final Warnings
The IMF said interest rates on debt also now exceeded expected nominal growth rates in a number of countries, which would make it even harder for them to stabilize debt.
"The time is now," Valdes said, underscoring the need for most countries to start fiscal consolidation. "This is unfortunately like the gravity law. There's no way out of the fiscal dynamics here."
(Reporting by Andrea Shalal; Editing by John Mair)
