Two credit ratings firms highlighted the continued rise in debt in the United States and developed countries, with S&P Global Ratings warning that only severe market pressure could change the trend.

The focus on debt has been heightened by analysis of the Group of Seven (G7) and similar economies, which face elections this week and come after the Bank for International Settlements warned that governments were vulnerable to a sharp loss of confidence.

S&P said in a report on Thursday that the chances of the United States, Italy and France successfully maintaining debt at their already high levels are slim.

“At this stage in their election cycles, only a sharp increase in market pressure could convince these governments to implement more resolute budget consolidation. Even so, a sharp deterioration in borrowing conditions would also increase the size of the fiscal adjustment required,” analysts led by Frank Gill wrote.

Scope Ratings noted that continued higher borrowing costs would weigh on the budget positions of these countries and the UK - a shift that would "heighten risks to sovereign debt sustainability".

Both reports came on a day when U.S. markets were closed for July 4 and come at a sensitive time in the election cycle in the United States and other countries. Biden faces increasing pressure to withdraw from the 2024 presidential race, British citizens voted on Thursday and France will vote to elect a new parliament this weekend.

Last Sunday, the BIS published a report with a warning from chief economist Claudio Borio: market experience shows that "things look sustainable and suddenly they are no longer sustainable."

The United States, the world's largest economy, remains in the spotlight. Last week, the International Monetary Fund slammed the country's borrowing practices. On Tuesday, Federal Reserve Chairman Powell again admitted that "our debt level is not unsustainable, but the path we are on is unsustainable - this is totally undisputed."

Both ratings firms have followed frequent debates in the U.S. Congress over the debt ceiling, which typically lead to lawmakers agreeing to raise or suspend the debt ceiling to avoid a shock to financial markets. Scope analyst Dennis Shen said the debate showed how difficult it would be to repair public finances.

“If at this stage the threat of default is needed to force relatively modest cuts to the Fiscal Responsibility Act, 2023, this highlights the pressure that may be needed to ensure that the debt trajectory stabilizes,” he wrote.

Likewise, S&P's Gill highlighted the lack of consensus in the U.S. on the need for fiscal austerity. "Both parties have been unable to gain broad support for aggressive steps to meaningfully reduce high fiscal deficits and curb the growth of government debt. This has affected creditworthiness," he said.

France's snap election has prompted calls for higher premiums on its debt from investors concerned about the country's fiscal resolve, also attracting attention from ratings firms. S&P noted that the country's public finance outlook is now more uncertain, but there is a "glitter of hope" - if Sunday's election results in a hung parliament and a budget cannot be agreed, the 2024 budget will apply. However, Scope's Shen warned that the country's rising debt could unsettle more investors after the spread between the country's bonds and their German counterparts widened "significantly".

“The new government needs to continue its cooperative relationship with France’s neighbors and the EU and undertake coordinated fiscal consolidation. If the sustainability of French debt is called into question, spreads could easily widen further,” he said.

The article is forwarded from: Jinshi Data