ALEX BRUMMER: Global threat of war debts as G7 borrowing spirals out of control

The gathering of US warships in the eastern Mediterranean and Britain’s decision to dispatch surveillance aircraft and other military resources to the region reflects concerns of a broader conflagration.

All the focus rightly has been on the terrible atrocities committed by Hamas, and the civilian exodus from northern Gaza.

The bigger geo-political risk is on Israel’s frontier where Hezbollah terrorists, operating in Lebanon and Syria, are armed with sophisticated rockets using laser-guided Iranian technology.

The threat of a broader war, and the need for the US, Britain and others to step up defence spending in a region of strategic importance, likely will become ever more intense.

The timing for most Western governments could not be more difficult.

On call: The gathering of US and British warships and military resources in the eastern Mediterranean reflects concerns of a broader conflagration 

The impact of three shocks – the great financial crisis of 2008-09, Covid-19 and Russia’s war on Ukraine – has sent G7 government borrowing and debt into the stratosphere. 

This at a time when belated central bank efforts to kill inflation are causing debts service payments to surge. 

Fiscal stresses largely are responsible for the bond sell-off, sending yields higher. In the US, the budget deficit in the 2022-23 fiscal year, which has just ended, climbed to $1.7 trillion. 

A figure nearer $2 trillion has been estimated if the impact of efforts to cancel student loans are included.

Both the US and Britain now have levels of debt close to 100 per cent of national output, joining an unfortunate G7 club of Italy and Japan where it is far higher.

Even Germany has a debt-to-GDP ratio of 60 per cent, which is likely to rise as recession and higher debt interest payments bite.

Since the beginning of the Russian invasion of Ukraine, the Biden White House, with the support of Congress, has committed $75billion to Kyiv in the form of defence and economic support. 

Republicans on Capitol Hill (fired up by the antics of Donald Trump) are starting to baulk at the bill. The last thing the US budget or the global economy needs is second major front in the Middle East.

In spite of the geopolitical perils, there appeared to be a degree of complacency at the IMF/World Bank sessions in Marrakech. This is a view borne out by a JP Morgan survey of key officials and bankers.

Debt interest payments are surging. In the US, the cost of debt service is forecast to rise from 2.6 per cent of output in 2023 to 3.6 per cent by 2033 and twice that in 2053. 

In Britain, the trend is even more worrying. It has been rendered worse by the Treasury hoisting itself on the scaffold of index-linked bonds. German interest rates costs have soared ten-fold over the last two years to £35billion.

All of this, and the possibility of having to shell out ever more on defence, makes the Chancellor Jeremy Hunt’s efforts to hold out against immediate Tory demands for tax cuts in next month’s Autumn Statement appear essential.

Hunt should not forget that doubling the numbers of middle Britons paying higher rate taxes to 8.9m in the period from 2020 to 2027-28 is an enormous disincentive to work and can only worsen the UK’s lagging productivity. Freezing tax thresholds is an act of self-harm.

Musical chairs

As an early, small investor in the Hipgnosis Song Fund, one cannot but be disappointed by vanishing revenues. 

Concern it would breach loan agreements led the fund to axe the dividend sending the shares tumbling.

This at a moment when founder Merck Mercuriadis is seeking to reduce debt by selling off a bundle of key assets to a Blackstone fund, also managed by Hipgnosis’ boss, in what is a clear conflict of interest. Among the song books up for sale are the rights to Kaiser Chiefs, Shakira and Barry Manilow.

Key shareholder Tom Treanor of Asset Value Investors is up in arms and wants to see a ‘terrible’ deal with Blackstone killed at a special meeting on October 26.

Less clear cut is Treanor’s suggestion that a vote against ‘continuation’ of the fund would simply hand back control to shareholders who could then push for a new board and re-organisation rather than dissolve the fund.

Either way, a board of directors led by corporate lawyer Andrew Sutch failed investors by allowing Mercuriadis infectious enthusiasm to run riot.

Sutch joins a growing list of ineffectual independent chairmen.