Coronavirus raises advanced economies' debt burdens: Moody's

June 22, 2020 (MLN): Moody's Investors Service says in a new report that the coronavirus-induced economic slowdown will raise advanced economies' debt burdens sharply as nominal GDP growth slumps and deficits widen markedly. However, their strong debt affordability for the time being will mitigate the rating implications of a largely one-off increase in debt.

"On average, we expect debt/GDP across 14 advanced economies (AE14) to rise by around 19 percentage points in 2020, which is larger, more sudden and broad-based than during the Global Financial Crisis, reflecting the acute and global nature of the coronavirus shock," says Marie Diron, Managing Director for Moody's Sovereign Risk Group.

The jump in debt burdens is largest for Canada (Aaa stable), France (Aa2 stable), Italy (Baa3 stable), Japan (A1 stable), Spain (Baa1 stable), the UK (Aa2 negative), and the US (Aaa stable). It is nearly entirely or mainly driven by fiscal measures in Canada, New Zealand, the UK and the US for instance, while weaker nominal GDP growth contributes more to the higher debt in Europe and Japan.

However, the governments' debt affordability will likely remain strong in an environment of low interest rates, mitigating in the next few years the rating implications of a one-off increase in debt/GDP ratios. Moody's expects that if nominal GDP growth returns broadly to pre-crisis rates, it should offset the impact of wide deficits on the AE14 sovereigns and allow debt burdens to stabilize at higher levels in 2021-22.

Over time, the effectiveness of policies to arrest and reverse debt trajectories during a period of strong debt affordability will determine the rating implications for the AE14. Failure to bring debt/GDP on a downward path would leave sovereigns more vulnerable to future economic or financial shocks.

Among countries with a high debt burden, Belgium (Aa3 stable), France, Japan, Spain, the UK and the US are most at risk of not seeing a significant decline. Moody's measures the size of the fiscal policy challenge by the difference between the primary balance that stabilizes debt/GDP in 2022-23 and the average primary balance in 2017-19.

Moody’s