Private savings are largely funding mounting public debt

To fight the COVID-19 economic crisis, developed and developing countries have implemented the most extensive economic stimulus packages in history. Public debt soared to record levels in many countries. In parallel, central banks shifted to highly accommodative policy stances with historically low interest rates and accelerated asset purchases.

While there are compelling arguments for rolling out further fiscal stimulus to minimize the economic impact of the pandemic and accelerate recovery, soaring public debt levels present serious concerns.

The financial sectors, including the central banks in the euro area, Japan and the United States, purchased most of the new public debt during the past year. While these purchases expanded the asset side of the balance sheets of the financial sector, the liabilities side grew with increased deposits mostly from non-financial business and household sectors. The changes in the liabilities side of the balance sheets suggest that households and private sectors indirectly financed the new public debt issues.

The savings rate of households and businesses jumped temporarily during the pandemic amid limited spending and investment opportunities, strong liquidity preferences and high-risk aversion during the crisis. The sharp increases in deposits sustained the price of public debt in 2020.

However, the demand for public debt may quickly wane should consumer confidence improve, non-financial private sector’s liquidity preference reverse and spending and investment return to their long-term trends. It results in declining prices of public debt securities and their rising yields. The yields of long-term public debt securities have already been on the rise, particularly in the United States.

Since there is a strong global consensus for further fiscal measures, the international community must support Governments to implement policy. To this end, the current situation calls for more international coordination to manage public debt securities and their prices in financial markets. Such coordination can prevent potential financial turbulence due to abrupt drops in the prices of public debt, supporting Governments to implement additional fiscal measures to cope with the ongoing pandemic crisis and its socioeconomic impacts.

Read more in the March Monthly Briefing on the World Economic Situation and Prospects.