Higher interest rates worry nations, too

The New York TimesJune 4, 2009 

As governments worldwide try to spend their way out of recession, many countries are finding themselves in the same situation as embattled consumers: paying higher interest rates on their rapidly expanding debt.

Increased rates could translate into hundreds of billions of dollars more in government spending for countries like the U.S., Britain and Germany.

Even a 1 percentage point increase could cost the Treasury an additional $50 billion annually over a few years -- and, eventually, an additional $170 billion annually.

This could put unprecedented pressure on other government spending, including social programs and military spending, while also sapping economic growth by forcing up rates on debt held by companies, homeowners and consumers.

"It will be more expensive for everybody," said Olivier J. Blanchard, chief economist of the International Monetary Fund in Washington. "As government borrowing in the world increases, interest rates will go up. We're already starting to see it."

Since the end of 2008, the yield on the benchmark 10-year Treasury note has increased by 1.5 percentage points, rising to 3.54 percent from 2 percent, the sharpest upward move in 15 years. Over the same period, the yield on German 10-year bonds has risen to 3.57 percent, from 2.93 percent. And British bond yields have increased to 3.78 percent, from 3.41 percent.

Concern over the long-term effect of greater debt prompted Ben Bernanke, the Federal Reserve chairman, to say in testimony before Congress on Wednesday, "Even as we take steps to address the recession and threats to financial stability, maintaining the confidence of the financial markets requires that we, as a nation, begin planning now for the restoration of fiscal balance."

For now, the cost of more debt is the price government is willing to pay to spend its way out of recession.

But in the last three weeks, the pace of the increase in the 10-year Treasury note has quickened, spurred by a Congressional Budget Office estimate that net government debt will rise to 65 percent of the gross domestic product at the end of fiscal 2010, from 41 percent at the end of fiscal 2008.

In 2009 and 2010, Washington will sell more than $5 trillion in new debt, according to Citigroup. A decade from now, according to the Congressional Budget Office, Washington's outstanding debt could equal 82 percent of GDP, or just over $17 trillion.

Although interest rates remain low by historical standards, the recent spike in rates comes at a critical juncture, threatening to damp the positive effects of new stimulus spending by governments around the world.

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