Debt market titans anticipating fiscal risks and rising defaults

LONDON: Apollo Global Management Inc’s James Zelter is “sceptical” of an economic soft landing.

Ares Management LLC co-founder Michael Arougheti is concerned about the risk of a fiscal accident. Defaults will rise in coming years as riskier debt comes due for refinancing, according to Joshua Easterly of Sixth Street Partners LLC and hedge fund manager Hamza Lemssouguer.

Credit markets may be stable as the global economy proves resilient, but some of the titans of the debt world told the Bloomberg Global Credit Forum in London last week that they see looming headwinds as the impact of higher interest rates slowly filters through to consumers and companies.

The comments signal that money managers are still anxious about the impact higher rates will have on borrowing after the fastest interest rate increases in decades.

Despite the speed of the central bank hikes, the amount of outstanding debt globally rose to a record US$307 trillion in the first half of 2023, according to the Institute of International Finance (IIF).

“The real impact of higher costs around the globe, in the United States and western Europe, it’s not been felt yet.

“When people say we’re going to have a soft landing, I’m sceptical,” Zelter said in an interview with Tom Keene, Jonathan Ferro and Lisa Abramowicz of Bloomberg Surveillance.

“I see a world where financial conditions have gotten tighter.”

Some signs of economic weakness are starting to emerge even as Federal Reserve officials say that rates may need to stay higher for longer.

A rise in fuel prices risks crimping household spending in the United States and China has turned to policy support to bolster the economy.

A cost-of-living crisis and higher interest rates led business activity in the United Kingdom to fall to the lowest since January 2021 this month.

“The downturn may have already begun,” Ana Andrade of Bloomberg Economics wrote in a note on the United Kingdom.

“We suspect the reading, which the Bank of England saw in advance of its September decision, played a significant role in its decision to hold rates.”

Governments like the UK’s that borrowed heavily during the pandemic now face a reckoning as they grapple with much higher interest rates.

The cost of servicing US federal debt jumped by 25% in the first nine months of the fiscal year, according to data through June.

The United States and United Kingdom are by no means alone.

Global debt as a share of gross domestic product is projected by the IIF to hit 337% by the end of 2023, well above pre-pandemic levels and largely driven by budget shortfalls. For Ares’ Arougheti, it’s what happens on this fiscal front, rather than monetary policy, that’s the main cause for concern.

“The big risk now, in the global context, is obviously what happens with deficit spending,” he said.

“There’s a bigger risk we make a mistake there.” — Bloomberg

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