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Government borrowing set to rise in 2023

Bonds being renewed at more than double the original interest rate

Anybody with a variable-rate mortgage or just entering the housing market knows what interest rates have done to household budgets. The cost of borrowing has squeezed out all but the necessities. And according Organisation for Economic Co-operation and Development (OECD) high interest rates are affecting almost every government in the world in a similar fashion. Nations’ borrowing needs are expected to increase in 2023 against the backdrop of Russia’s war of aggression against Ukraine, and as many OECD countries seek to cushion households and businesses from rising prices.

 The report says there is a lot of government debt that was borrowed at 1 or 2 percent that is coming up for renewal. Almost half of OECD marketable debt – some USD 23 trillion – will fall due over the next three years. Borrowing costs have more than doubled for OECD sovereigns since 2021, with the average yield of sovereign bonds at issuance rising from 1.4% in 2021 to 3.3% in 2022, and look set to rise further still in the near term. As a result, countries face elevated refinancing risk, and many governments will spend a higher proportion of their budgets servicing debt and may face greater fiscal constraints in the years ahead.

Countries selling bonds face further challenges beyond higher rates, according to the report. Central bank demand for bonds has largely evaporated, leaving the private sector to absorb high volumes of new issuance and refinancings. Liquidity in markets has also deteriorated, potentially increasing borrowing costs further and giving less flexibility to debt managers to adapt to shifting borrowing needs.

At some point this increase in borrowing costs could start to eat into government’s ability to finance major infrastructure projects.

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