Government borrowing set for post-crisis record of £11 trillion

GOVERNMENTS need to borrow £11 trillion on financial markets this year, breaking the previous record of £10.9trillion that was set during the recession-fighting spending spree at the height of the financial crisis.

The bulk of the borrowing is down to governments refinancing existing debt mountains as bonds issued to finance earlier debt-fuelled spending mature.

But more than £2 trillion is new borrowing as nations continue to add to their national debts, according to data from the Organisation for Economic Co-operation and Development (OECD). The US budget deficit hit more than 4pc of GDP last year.

Governments can afford the debt burdens now because of benevolent market conditions and interest rates that are very low.

But the OECD warns that the heavy level of borrowing leaves governments vulnerable to any worsening in financial market conditions.

Countries including France, Italy and Spain risk being particularly exposed in periods of financial turmoil.

“Roll-over risk should be manageable under relatively ‘normal’ market access conditions,” said the OECD. “However, funding conditions for governments can become difficult due to the complications generated by sudden shifts in market sentiment.

“If market sentiment turns negative, risk premiums may rise sharply, putting public debt sustainability in danger depending on the length of the stressed period.”

Italy has already seen some such periods in recent years, including the sovereign debt crisis in the eurozone, and last year’s row with the EU over its budget deficit and debt plans.

Rising interest rates are also a threat as they make borrowing more expensive. “A sustained increase in interest rates pushes up debt servicing costs and, in turn, can put public finances and debt sustainability under sustained pressure,” said the think tank.

“Going forward, with monetary policy stance expected to be less supportive, heightened financial and political risks could increase the probability and potential impact of adverse liquidity shocks to the financial system.”

Countries can seek to limit these risks by borrowing money for longer periods of time, reducing the quantity that becomes due for repayment each year and locking in low interest rates.