Towards a global debt crisis?

Governments are increasingly meeting their fundraising needs by issuing debt, not only through regular auctions but also, increasingly, through syndicated sales involving paying fees to investment banks to build a portfolio of investors. Corporations and banks once dominated this latter approach, but this year, sovereign borrowing in the eurozone and the UK accounts for half of all new syndicated debt. There is a risk that governments will crowd out companies with growing needs over the next three years to access the bond market.

The total sales of debt denominated in euros and pounds sterling increased by 17% this year to reach a record €680 billion in the first quarter, up from €582 billion for the comparable period last year. The ten most significant syndicated operations denominated in euros this year came from government-related issuers. Public borrowing is set to rise inexorably at a time when central banks are no longer the biggest buyers in the market and are disposing of their vast bond holdings accumulated through quantitative easing.

The UK government aims to raise ￡62 billion this quarter, a significant increase from the ￡23 billion raised in the first three months of the year. This includes at least two syndications totalling up to ￡8 billion each. The UK has borrowing needs of ￡265 billion for the coming year, a record amount.

Eurozone countries will raise gross €1.25 trillion in 2024. The new liquidity will amount to around €450 billion, but with the European Central Bank shrinking its balance sheet, this amount will effectively rise to €675 billion. That's at least €100 billion more than last year. France and Germany will each borrow €185 billion. The European Union has rapidly become a major issuer, contributing to funding its pandemic rescue program. Its goal is to raise €75 billion in the first half. It executed the largest operation in March, selling €7 billion in green bonds.

These increased government debt sales come at a time when companies face a refinancing wall. Companies were smart in raising significant debt at meagre interest rates in the second half of 2020 and 2021. Unfortunately, this means that $3 trillion in the US and Europe will mature over the next three years, a quarter of the total outstanding corporate debt. Euro-denominated high-yield issuers, for example, have seen the average duration of their bonds halved, dropping to four years from over eight years a decade ago.

Whether sold at auction or through syndication, government bonds are entirely fungible. This makes them attractive for investors buying through syndication, as their yields can outstrip their benchmark indices.

If financial conditions deteriorate, the average yields of top-quality euro companies, at 3.2%, could start to look low compared to the 3.3% available for Italian five-year government securities. Additionally, greater liquidity, tighter spreads, and higher trading volumes on sovereign debt could tip the scales against private-sector issuers.

Most top-quality companies could face widening credit spreads above government benchmark indices. Larger, well-known, or multinational companies can still access the US market. However, market access may become more limited for weaker, lower-rated credit quality companies.

For the banking sector, it's more complicated. The withdrawal of the ECB's ultra-generous funding programs means that banks must increasingly replace their funding with high-quality, secured covered bonds that encumber large swaths of assets. Their yields are generally close to those of government debt.

Governments are not only tapping institutional investors' money; they are also targeting retail buyers for their bond sales. Belgium raised €22 billion from retail investors last year. Italy has long-standing relationships with its citizens, who have lent it €350 billion, about 15% of its total debt.

As long as investors are content to buy at higher yields today than during the pandemic, everything should be fine. However, as states, companies, and financial institutions have to raise staggering amounts simultaneously this year, the risks of bond market dislocation and systemic failure grow.