Germany’s general state debt spiral should be a constant feature in daily headlines. Its prominence should force policymakers into a radical fiscal turnaround. Yet while Germany is working under immense pressure to ban the AfD, forming alliances with left-wing extremists and eroding the political culture, on the other side of the Atlantic, preparations are underway for the approaching storm.
We live in record-breaking times. In the first quarter of this year, global debt surged to a record high of $324 trillion. This milestone becomes significant when compared to global GDP, which currently hovers around $110 trillion. Governments worldwide now owe 100% of GDP — an alarming reality, as no modern state has ever managed to free itself from the ensuing fiscal bind once this threshold is reached. Debt levels of 80-90% mark the “point of no return.”
The Tipping Point of the Debt Spiral
At this scale, debt reaches a critical mass. It inevitably forces an escalating debt service burden that drains scarce capital from the private sector to finance bloated social funds, ultimately leading to the same scenario we faced 15 years ago during the last severe sovereign debt crisis. Back then, Greece’s impending default sent shockwaves across credit markets. Central banks intervened with trillions, and governments stepped in to rescue debt-laden pension funds and banks with taxpayers’ money.
Greece’s national debt stood at 143% at the onset of this crisis, and it is now about 155% — no debt consolidation has occurred. The southern European countries are, quite frankly, sinking into a swamp of debt. Italy, with 140%, Spain at 120%, and France’s budget deficit at 7%, leave much to be desired. On average, the EU’s debt-to-GDP ratio is now approaching 95%, closing in on the global benchmark of 100%.
Bond Vigilantes Lurk in the Markets
We must now prepare for the moment when a tipping point in bond markets triggers a series of sovereign defaults. This will occur when a growing crisis of confidence among investors, banks, and investment funds translates into a sell-off cascade in the bond markets. Let’s keep an eye on interest rates: if they rise with high volatility and market volume, general unrest is on the horizon. We have already witnessed the emergence of “bond vigilantes” this year — critical bond investors who pull the plug when debt levels rise. On the day it was announced that Germany would borrow about a trillion euros over the next four years and issue corresponding bonds, the interest rates on German bonds surged by more than 40 basis points.
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