America sinking in debt will first submerge Poland

07.06.2018 17:26 | Marcin Lipka

"Only shortly after the Second World War did US debt to GDP exceed 117%. This is expected once again in a few years time, due to fiscal stimulation. However, an interesting and historical injustice may be the fact that the effects of this rapidly growing debt will not be felt by Americans for the time being, but by Poles," writes Marcin Lipka, Conotoxia Senior Analyst.

Marcin Lipka, główny analityk Cinkciarz.pl

The cost of financing the increasing debt of the United States will be covered by the countries which need foreign capital for their development, including Poland. Why? First of all because the US will source the capital for debt service from all over the world, as well as from domestic companies and households (40% of US debt is kept abroad). There will therefore be less money for other countries.

Interest and high credibility are the United States strongest weapons

This intake will be exacerbated by the fact that interest rates have been rising. OECD estimates show that by the end of next year US interest rates will have reached 3.5% and 10-year government bond yields will have reached 4.5%.

Investors may be a little concerned about the raging debt in the United States but, when comparing overall creditworthiness with other countries, America still guarantees repayment of its liabilities, even with such a high deficit. In contrast, high interest rates on this debt will attract capital to the dollar, especially due to the lack of better alternatives elsewhere.

Therefore, the USA inhabitants will be happy with relatively fast economic growth, inflow of capital financing the debt and strong dollar. Higher interest rates will be a problem, but a rushing and strongly stimulated economy should not stop there.

Poland will be among those most affected

The negative effects of the capital flow to the US will be felt first through the stronger dollar. Crude oil in PLN will be more expensive as well. Poland will also be less likely to receive portfolio capital because, having an alternative in the form of the United States, it will choose a destination on the other side of the Atlantic.

In the case of Poland, significant financing needs (the structural deficit in 2019 will be 2.7% - one of the highest in the EU, according to the OECD) are not an incentive for foreign capital, for example, due to the currency risk and much lower creditworthiness than in the case of the USA. With unchanged interest rates in Poland and dependence on the weakening economic situation in the eurozone, foreign capital may demand a bonus for risk in the form of, for example, the weaker zloty.

Paradoxically, Latin American countries, developing countries in Asia and Poland may be the victims of the United States fiscal madness. These damages will, of course, be higher the worse the economic situation in these countries will be and the more they will have to borrow in the coming years.

How will America reach 117%?

Official data from the Office of Management and Budget (OMB) show that at the end of 2017, US debt to GDP was 103.7%. For several years, the debt has been more or less stable, but recent tax cuts have significantly changed the deficit and debt trajectory.

According to the latest OECD estimates published at the end of May, the US public finance deficit is expected to reach 6.1% of GDP next year, or well above one trillion dollars. The IMF also presents very similar estimates - 5.9%. The fund further estimates that the deficit will exceed 5% of GDP each year in the next five years, and that the total debt to GDP will reach 116.9% in 2023.

 


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