US debt is out of control. The International Monetary Fund has defined the sustainability of US public debt as worrying, with a trajectory deemed unsustainable in the medium and long term.
America’s problems, however, will not remain on the other side of the ocean and will also affect Europe and Italy. This is because the United States, to finance its maxi-debt, offers high returns and no real risk.
How is US debt doing?
Not good. The United States would spend about $2.9 billion a day on debt interest alone. These are the data published by the Treasury for the fiscal year ended September 30th.
The deficit is at 1,990 billion dollars, 12% more than the previous year, and interest has become the third largest item in the federal budget, behind pensions and Medicare and before defense. Net interest reached a record 1,050 billion, growing more than revenue, total spending and GDP.
The United States’ difficulty is linked to the cost of money: average rate at 3.53% (double that of 2021), gross debt over 40,000 billion and ten-year yield above 5% after the tensions and war with Iran, against the 4.1% forecast by the Congressional Budget Office.
Furthermore, the estimates risk worsening: as the Committee for a Responsible Federal Budget calculates, if yields remained one point above estimates, in 2030 interest would cost 2,800 billion, equal to 5.9% of GDP.
The burden of US debt on Europe
So far the problem seems to concern only the United States, but this is not the case. The US Treasury must roll over more than $10 trillion in short-term debt. To convince investors to buy its bonds (Treasuries), it is offering very high interest rates, above 5%.
A great advantage for savers and investment funds, who prefer to move capital to the United States rather than invest it in Europe. The Draghi report already warned about the approximately 300 billion euros of European savings that go abroad every year, mainly to American markets.
This money thus ends up financing American technological innovations (data centers, artificial intelligence, microchips) and the defense of the United States. Resources that could go to support the ecological transition, industrial reconversion and strategic autonomy of the European Union, but the USA offers more.
Italy pays a double price
Europe is already footing the bill, but Italy pays a doubly high price due to the enormous size of its public debt. In terms of public finances, Italy is performing well and the markets are confident, as demonstrated by the historically low spread of around 105 points.
The point is that the yield on Italian BTPs cannot fall below a certain margin: if American debt (the world’s reserve currency) yields 5%, no investor would buy an Italian BTP at a much lower rate, for example 3%. US rates establish a sort of minimum ceiling which Italy cannot ignore.
And it is in this context that the Italian Treasury finds itself forced to place the BTP Valore and the new BTP Valore Insieme with particularly high yields and coupons, precisely to convince families to keep their savings at home.
What needs to be done?
According to the International Monetary Fund, there is a risk that a mechanism that is difficult to stop will be triggered: more debt leads to greater exposure to rising rates and, if investors begin to doubt the sustainability of the accounts, they can ask for even higher interest to lend money.
According to the Fund’s estimates, the effective average cost of financing governments could rise from 2.3% in 2021 to 3.7% in 2031.
Global public debt, already at 94% of GDP in 2025, could thus reach 100% by 2029. So what to do? The director general of the IMF, Kristalina Georgieva, indicated a few but significant lines:
- China is asked to spend more to support domestic demand;
- for the United States to save more and cut the deficit;
- Europe to invest more.
The final warning, however, concerns everyone: the longer the rebalancing of public finances is postponed, the more expensive and painful it will become to achieve it.
