OECD Outlook on Sovereign Debt and Financing Conditions

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The OECD Outlook on Sovereign Debt and Financing Conditions

The recent global disruptions from the Covid-19 epidemic, the conflict in Ukraine, and the ongoing inflation surge are reshaping the financial landscapes of the world’s advanced economies. Narrowing fiscal space meets higher prices and rising interest rates, with central banks retrenching as major buyers of government bonds. This environment means many governments will need to refinance a substantial portion of their debt in the next few years, elevating the stakes for public finances and global market stability.

In a report on sovereign indebtedness released in 2023, the Organisation for Economic Co-operation and Development (OECD) notes that both gross and net financing needs are increasing. It projects that gross borrowing will grow by about 6 percent this year after a notable reduction in 2022 from the 2020 peak during the health crisis. Net financing needs are expected to rise by around 4 percent. These shifts reflect a shift in the cost of borrowing and the persistent pressure on public balance sheets in developed economies (OECD findings).

The OECD highlights a striking figure: roughly half of transferable debt, about $23 trillion, is set to mature and require refinancing within the next three years. The cost of government borrowing has nearly tripled since 2021 due to rising interest rates, and the trajectory suggests further increases in the near term. The average cost of issuing debt has climbed from about 1.4 percent in 2021 to approximately 3.3 percent in 2022, underscoring a meaningful tightening in sovereign financing terms (OECD data).

Another key warning from the OECD relates to the central banks withdrawing from assets purchases, notably the European Central Bank. As their demand for bonds stabilizes or declines, the private sector is left to absorb the bulk of new issuances and the refinancing wave ahead. This withdrawal could reshape market dynamics and raise funding costs for governments at a time when policy normalization is accelerating (OECD analysis).

OECD Secretary-General Mathias Cormann notes that 2023 marks the end of a long stretch of favorable financing conditions for sovereign issuers. The evolving landscape is driven by new realities and a rapidly changing market environment, further complicated by the latest geopolitical and economic tensions stemming from the Russia-Ukraine conflict. These forces together redefine the conditions under which governments manage public debt and financing operations (OECD commentary).

The surrounding context brings into focus the risks of a potential debt crisis in coming years. The OECD emphasizes that developing economies could be particularly exposed as advanced economies like the United States operate in a financial nexus that influences global savings and capital flows. Governments may face higher refinancing risks and increased debt service costs, potentially squeezing budgets and limiting policy flexibility in the near term (OECD assessment). In this environment, many governments may need to dedicate larger shares of their budgets to debt servicing, which could constrain public investment and social spending unless fiscal strategies adjust to the new conditions (OECD briefing).

The report also points to the rise in long-term yields since 2021 as one of the sharpest increases observed in recent years when compared with other notable episodes of yield tightening. This acceleration underscores how quickly financing conditions can tighten and how sensitive high-debt countries are to shifts in global interest rate expectations (OECD metrics).

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