UK - Credit ratings on sovereign bonds will plummet by the end of the decade unless governments tackle the effect of ageing populations, Standard & Poor's claims.
The global ratings agency warns that unless Organisation for Economic Co-operation and Development member nations – such as the UK, the US and Germany – reform their state social security systems, their finances will come under “intense pressure”, which will slash their credit ratings.
According to S&P projections, the debt ratio of a typical OECD country will rise to 139% of gross domestic product by 2050, from 47% in 2010, due to increased age-related spen-ding. It also believes that fiscal deficits as a percentage of GDP would hit double-digit figures.
This would potentially slash the ratings of government bonds that are currently rated as investment grade to junk status. S&P credit analyst Moritz Kraemer explained: “The vast majority of countries would display fiscal characteristics that today are associated with non-investment-grade sovereigns.
“Sovereign ratings could come under intense pressure as early as the end of this decade, unless governments start tackling this threat effectively.”S&P simulations of the fiscal trends in 25 OECD nations found that the worst affected will be the US, Japan and continental European states, such as Germany and the Netherlands.
Barclays Global Investors chief economist Haydn Davies said: “Obviously, this all dep-ends on what policies governments put in practice between now and then.
“For example, in Italy the government has backtracked on its pension promises and said you won’t be able to retire for ages. That’s probably the most likely outcome.
“If that doesn’t happen, debt levels will simply explode. The alternative is to raise taxes on a shrinking workforce and that becomes increasingly difficult in European markets as workers will emigrate to markets that offer the lowest tax rate.
“But I think this is a doomsday scenario and it is extremely unlikely that we’ll get to that stage.”
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