International Monetary Fund chief economist Pierre-Olivier Gourinchas sits down with Yahoo Finance Senior Reporter Jennifer Schonberger to discuss the outlook for global debt.
“We are seeing very elevated debt levels. In many countries, governments had to spend to protect their economy during the pandemic and then during the energy crisis that resulted in part from Russia’s invasion of Ukraine and the surge in gas prices and oil prices… These higher debt levels make them more vulnerable if growth were to slow down, if interest rates were to stay high, or if markets start becoming nervous and then stop asking for risk premium and start asking for a higher interest rate on government debt,” Gourinchas tells Yahoo Finance.
He notes that investors are requiring more compensation for holding long-term debt. Even as central banks cut interest rates, they remain relatively high, meaning that funding costs for governments remain elevated, especially as investors seek a higher risk premium.
As the US presidential election lies just days away, both presidential candidates are likely to add to the deficit. Gourinchas explains, “It’s certainly the case that investors are already requiring higher rates on US government debt. We are not concerned about the situation getting out of hand. But right now, if you look at the macroeconomic environment, the US economy is above its potential. The economy is doing really well.”
He notes that the Federal Reserve is holding interest rates high as it eyes a soft landing for the US economy. “In that context, having an expansionary fiscal policy, that would be something that could potentially derail the disinflation path. It would add to growth, but it would add to inflation. It would require that the Federal Reserve come in and do more. So this is certainly not something that would be desirable in the current environment, given the trajectory that the US economy needs to be on, which is that it needs to come back to potential output, then inflation pressures are gone,” Gourinchas adds.
Catch Pierre-Olivier Gourinchas talk about the IMF’s proposed “triple pivot” for the global economy and the risks posed by international tariffs.
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This post was written by Melanie Riehl