May you live in interesting times, the Devil
Leitmotif 3: Fiscal challenges
The Devil Tarot card signifies addiction, materialism, hedonism (but upside down it signifies freedom, release, restoration of control).
Macro-credit events were the dog that didn’t bark in 2023. Corporate bankruptcies rose in most countries as real interest rates rose to decade-plus highs, invalidating the business models of companies reliant on either low interest rates, globalization or both. But despite historically high levels of government and national debt in many countries, there were few macro-credit events in 2023 and only one – the failures of a few US regional banks – that had any broader market effects.
But that doesn’t mean macro-credit risk won’t bite in 2024. Growth is slowing across most countries and high real interest rates – relative to the last decade – are entering their third year (or fourth for some emerging markets). Of the 57 economies for which I undertook detailed debt sustainability analysis in Debt reality versus perceptions, 35 have unsustainable government debt levels and 31 have unsustainable nation debts when private-sector debt is included. Rising rates and falling growth aren’t the only potential triggers. As highlighted in earlier parts of this series, the geopolitical environment suggests unprecedented event risk lurks in the background. For those countries in (rapidly expanding) war zones, refinancing may become difficult. In this uncertain environment, even macro-credit outcomes that were previously unthinkable appear to be plausible.
Coincidentally, Argentina, with its election of Javier Milei as President, has treated us to a fascinating policy experiment, particularly in contrast with neighboring Brazil, where President Lula has thrown away any pretence of budgetary prudence. President Milei’s slash-and-burn deficit reduction is at odds with both political and the establishment economic conventional wisdom. But Argentine voters overwhelmingly chose Milei’s machete – he could not have been clearer on his intent during the campaign – and more pertinent to this piece, his policies are exactly what detailed empirical studies of highly indebted economies suggest is the way to both cut Argentina’s debt and return it to growth. The debate over this issue, between the economic establishment and the “Italians’” empiricism, has been particularly vicious, but perhaps Argentina versus Brazil will give us an answer.