The Organisation of Economic Co-operation and Development logo is seen at its headquarters in Paris. The OECD yesterday said the world’s richest countries will borrow less from the market this year than at any time since 2007.
The world’s richest countries will borrow less from the market this year than at any time since 2007, the OECD said yesterday, as governments tighten their belts in the wake of the debt crisis.
The Organisation for Economic Co-operation and Development estimated that the net new borrowing needs of its 34-member countries would fall to $1.5tn (€1.09tn) this year.
This is a sharp drop from the $2tn last year and less than half the borrowing requirement at the height of the debt crisis in 2009 when they borrowed $3.3tn.
The drop is mainly due to governments reining in the ballooning deficits and debt that sparked the debt crisis in the first place.
Net new borrowing is the amount raised on the markets minus the redemptions governments receive when their sovereign bonds mature.
Gross borrowing is also set to fall in the OECD club of advanced democracies – from $10.8tn in 2013 to $10.6tn this year.
However, the OECD warned that the next few years could see a hive of activity on the bond markets given what it termed a “challenging” redemption profile.
“For the OECD area as a whole, governments will need to refinance close to 29% of its outstanding long-term debt in the next three years,” the report said.
Meanwhile, the OECD yesterday warned financial markets may be facing periods of “considerable turmoil” as central banks in developed economies prepare to reverse the stimulus programmes they put in place in the wake of the 2008 financial crisis.
In its annual report on government borrowing, the Paris-based research body said the agencies responsible for selling government bonds will have to cooperate closely with central banks to ensure that the exit from those programmes is as smooth as possible.
But it said both sets of institutions face huge challenges in communicating their intentions to investors without triggering a sharp rise in government bond yields and other forms of harmful volatility in asset prices.
The OECD said that as a result of its stimulus programmes, the US Federal Reserve held $2.15tn of Treasury bonds as of November 2013, while it expects the Bank of Japan to hold ¥190tn ($1.86tn) of Japanese government bonds by the end of 2014. The Bank of England has purchased £375bn ($622.91bn) of UK government bonds.
Central bankers have yet to decide what portion of those holdings they will sell, and over what time period. The OECD said bond sales by central banks are likely to take place when the borrowing needs of governments remain high, with the result that interest rates will rise. But it said that the reaction of investors to recent moves by the Fed to taper its stimulus programme highlight the risk that rates will move earlier and more sharply than policy makers would wish, possibly damaging the economic recovery.
“Expectation about imminent exits could rock government securities markets by pushing up longer-term rates in government bond markets more strongly than desirable or warranted,” the OECD said.
The research body said investors may react to announcements of central bank policy changes by anticipating subsequent moves, leading to a tightening of monetary policy before that is appropriate to the state of the economy.
“There is an apparent gap between the reality of investors seeking to price final destinations on the one hand, and the desire of central bankers to minimize the scope for disorderly shocks, on the other,” the OECD said. “Central banks are facing extraordinary expectation-formation challenges.”
The research body said that given the novelty of tapering and the reversal of stimulus programmes, it may not be possible for central banks to announce policy changes without prompting turbulence in financial markets.
In order to minimise market disruption, central banks, governments and debt management agencies should work together to communicate their intentions as clearly as possible.
“Failure to do so may not only affect adversely the credibility of the overall monetary and fiscal exit strategy, but it may also prompt a return to dysfunctional markets, including higher stress in inter-banking markets and sovereign debt markets,” the OECD said.