OECD countries face a growing risk of a refinancing pinch next year as they battle to secure investor confidence while rolling over trillions of dollars in debt, the Paris-based organisation warned on Monday.
Members of the Organisation for Economic Cooperation and Development will have to tap financial markets for a gross sum of $10.5 trillion in 2012, up slightly from $10.4 trillion this year, the think-tank said in a study on government borrowing needs.
Over the coming three years, governments will have to refinance about 30 percent of their outstanding long-term debts, setting the stage for a rollover challenge for many Group of Seven and euro zone countries.
Challenging redemption profiles combined with high deficits imply greater refinancing risk, the OECD said in an overview of a broader report due for publication in January.
Clearly, a spike in interest rates would then result in higher interest expenses which in turn would further increase borrowing needs, it said.
The OECD's head of public debt management, Hans Blommestein, said the risk was not a shortage of investor funds to finance governments' borrowing needs, but rather a lack of confidence.
I think there is a lot of investing demand for sovereign assets, he told Reuters. But the problem is there is a lot of uncertainty about fiscal plans.
In the case of the euro zone there is a lot of market mistrust about any outcome. Personally I think that it is totally unjustified, he said, adding that euro zone leaders had adopted deep fiscal reforms since Greece's debt problems first triggered the currency bloc's debt crisis.
The OECD said countries would have no choice but to grapple with debt market mood swings with the risk of yesterday's safe havens suddenly falling out of favor as investors' perception of risks shifted, sometimes due to ratings agency downgrades.
Clearly, mood swings associated with changes in perceptions of sovereign risk are a major complicating factor for sovereign issuers as bond market pressures have the potential to trigger ultra-high funding costs by demanding compensation for (perceptions of) higher sovereign risks, the OECD said.
Against that backdrop, many government debt managers are trying to become less dependent on short-term debt to reduce the flow of debt redemption in the near term, issuing instead longer-term but more expensive bonds.
Only the sovereign debt issuers with the strongest public finance fundamentals were opting instead to ramp up cheaper, short-term issuance.
(Reporting by Leigh Thomas; Editing by Susan Fenton)