Investors should be wary of reading too much into sovereign downgrades, says the Organization for Economic Co-operation and Development (OECD) in a new report.
The Paris-based OECD says that gross government borrowing is forecast to rise slightly in the year ahead. It projects that the gross borrowing needs of OECD governments will increase slightly to around USUS$10.9 trillion in 2013, up from the already high level of USUS$10.8 trillion in 2012.
In its report, the OECD says that it expects the ratings agencies to continue to keep the pressure on governments in 2013. But, it cautions, “Given their poor track record of sovereign risk pricing over the past twenty years… any downgrades should be carefully scrutinized, and not taken at face value.”
The OECD also says that general government deficit for the OECD area as a whole is estimated to have reached 5.5% of GDP in 2012, equivalent to around USUS$2.6 trillion. But, it is projected to decrease to 4.6% of GDP in 2013, while net borrowing is estimated to fall to USUS$2.0 trillion in 2013, it reports.
Additionally, government debt ratios for the OECD as a whole are expected to either grow, or remain at high levels, during the coming year. General government debt-to-GDP is projected to reach 111.4% in 2013. The good news, according to the report, is that overall debt ratios are increasing much more slowly than in the past.
However, it says that many countries will still face challenges in raising large amounts of funds at the lowest possible costs. “In countries where public deficits and debt ratios have not begun to decline, the legacy of public debt exposes governments to shifts in confidence, complicating the implementation of issuance programmes by sovereigns,” it says.
For the OECD area as a whole, governments will need to refinance around 30% of outstanding long-term debt in the next three years. The OECD average long-term interest rate is expected to rise to around 4.0% in 2013, up from 3.8% in 2009.