Debt issuances in OECD countries will grow again by 6% due to the costs of the war in Ukraine

The snowball gets fat again. After the exceptional indebtedness caused by the pandemic in 2020, the countries of the Organization for Economic Cooperation and Development (OECD) had been reducing their liabilities for the following two years. However, the war in Ukraine continues to take its toll on the economies of that club, which forecasts that the borrowing needs of its members will grow by 6%. The Paris-based organization also warns that in the next three years it will mature half of all debt, about 23 trillion dollars (21.3 trillion euros), in an environment of rising interest rates. Therefore, the OECD urges executives to deploy "credible institutional frameworks" to manage that debt.

The pandemic sent the main economies of the planet into hibernation. Governments responded by laying a protective mesh that meant asking the markets for 15.4 billion dollars (14.3 billion euros). But then the response to the crisis was unison: central banks lowered interest rates to negative rates and flooded the market with liquidity. And that provided cheap financing to safeguard businesses and workers. As a result, global indebtedness reached a record high. According to the World Bank, public debt reached almost 100% of GDP. In the case of OECD countries, it climbed to 88%.

Governments were able to release ballast as their economies reopened. The national treasurys reduced the debt in 2021 and 2022, to 83% of GDP. That dynamic is not going to continue this year. The club of the richest countries predicts that they will go to the markets to obtain 12.9 billion dollars (12 billion euros), 6% more. "This rise is mostly limited to the countries that have received a greater impact of Russia's war against Ukraine," says the report published on Monday by the OECD. The economic growth expected for these countries will allow the level of indebtedness to remain stable, at 83%, but almost 10 points higher than it was before the pandemic.

Whether a debt level is low or high depends on several factors. "Take two countries with the same level of debt overhang, but with two different types of government or with debt denominated in different currencies. One of those debts might be safe, while the other might not be," former International Monetary Fund chief economist Olivier Blanchard recently wrote. The OECD, however, warns that the environment is now very different from 2020. Central banks are not only raising rates, they are also stopping buying debt. And the average interest on sovereign debt in the countries of this club has gone from 1.4% in 2021 to 3.3% in 2022.

The question is, therefore, how much of the debt held by countries is about to mature and will therefore need to be renewed at a higher yield. And the OECD's answer is that more than half will do so in the next three years. That is, 23 billion dollars (21.3 billion euros). As a result, countries face elevated refinancing risk, and many will spend a higher proportion of their budgets on debt servicing and may face greater fiscal constraints in the coming years.

Follow all the information of Economy and Business on Facebook and Twitter, or in our weekly newsletter