Public debt? Globally it risks being a problem

Thirty-year government bond yields have risen well above 5%, to levels approaching the highest since 2007. Japanese ones are at levels not seen in decades. Then there are the French government bonds, which until a few months ago had a spread over the German ones of 80 basis points (later returned to 60). And while Italian, Spanish and Portuguese bonds seem to be on a happy island, the question echoing in the markets is one and only one: is there a public debt problem in the world, especially in the US, France and other countries? In short: is there an alarm? The markets are very tense, especially the United States. Are they right?

From the Trento Festival, in a round table dedicated to this very topic, the answer came single, loud and clear: yes, public debt is a problem. "The world is sitting on a probable public debt bomb that if badly managed can explode," says Rita Mascolo of the University of Catania. For Maria Cannata, now president of Mts but for many years director of the public debt department at the Treasury, 'it is very important to be aware that it is a problem, because when you think it is not, you make wrong choices and start uncontrolled effects'. Arrigo Sadun, president of Tlsg Internatiobnal Advisor, also admits that 'there is a public debt problem'. Then he adds: 'It has to be managed to prevent it from leading to disaster and there is a good chance that disaster will be avoided'.

All eyes are on the United States these days, with Treasury yields in sharp tension as Trump tries to push his tax package through Congress. 'The explosion of US debt is a recent phenomenon, a decade ago the US budget was in surplus,' Sadun observes. 'It all happened with Covid, which increased spending by $2 trillion, and with the advent of the Biden administration, which increased spending by $5 trillion.' Trump's idea is to finance the tax cuts (which are not new tax cuts but the continuation of expiring cuts) using the revenue from the tariffs. But the markets are sceptical. 'The US has a $6 trillion structural budget adjustment over 10 years,' Sadun calculates. 'That means $600 billion is needed every year. Realistically, duties can bring in 150-200 billion in revenue per year, which is about 30 per cent of what is needed. Other revenues will come from spending cuts, but Musk's and the Doge's goals are unrealistic: on paper another 150-200 billion could come from this front. Then there are other folds in the budget from which Trump is trying to recover something, but I think it could come to 50 billion. On paper, therefore, the US President will be able to finance about 70-75% of the needs'. The important thing,' he concludes, 'is that the Budget with the tax cuts passes Congress. "Otherwise the US economy will pay the consequences". Maria Cannata, on the other hand, touches on a delicate topic: 'I see a criticality in the US public debt due to the fact that it is held in massive proportions by countries that have reacted badly to the announcements on duties: I am thinking of China, but above all Japan, a traditional ally of the US that has over a trillion in Treasuries'.

Alternating tensions, however, on the European markets. Italy, for example, is experiencing a sort of honeymoon with the markets, as the BTp-Bund spread has fallen to around (or below) 100 basis points. 'Italy is much appreciated now for a certain stability and for the maintenance of public accounts,' Maria Cannata explains. 'However, I do not think that European debt is structurally safer today than in the past. For example, there are now concerns about France, which continues to have a fairly high debt, whereas if we look at Portugal for example, it is now considered the most virtuous country in Europe'. Rita Mascolo, on the other hand, puts her finger on the sore spot: 'The problem in Europe is the absence of political coordination. The Eurobond project is a long way off, the divergences between states are high, and financing the energy and digital transition is not easy without common debt. In short, the alarm about global debt is high. Tensions are high on some countries, perhaps for no real reason. Time will tell how this will play out.