LONDON: Apollo Global Management’s James Zelter is “skeptical” of a soft landing for the economy.
Michael Arougheti, co-founder of Ares Management LLC, is concerned about the risk of financial disaster. Defaults will increase in the coming years as riskier debt comes due to be refinanced, according to Joshua Easterly of Sixth Street Partners LLC and Hamza Remsgaer, a hedge fund manager.
Credit markets may be stabilizing as the global economy proves resilient, but some of the debt giants warned last week at the Bloomberg Global Credit Forum in London that interest rates would rise. He said he sees headwinds looming as the effects of the pandemic gradually permeate consumers and businesses. .
The comments suggest that financial managers remain concerned about the impact of higher interest rates on borrowing, following the fastest rise in interest rates in decades.
Despite the pace of central bank interest rate hikes, global debt outstanding rose to a record US$307 trillion in the first half of 2023, according to the Institute of International Finance (IIF).
“The true impact of higher costs is yet to be felt around the world, including in the United States and Western Europe.
“People say it’s going to be a soft landing, but I’m skeptical,” Zelter said in an interview with Tom Keene, Jonathan Ferro and Lisa Abramowitz of Bloomberg Surveillance.
“I think the global financial situation is getting even tougher.”
Some signs of economic weakness are beginning to emerge, even as Federal Reserve officials have said they may need to keep interest rates high for longer.
Rising fuel prices risk squeezing household spending in the United States, and China is turning to policy support to prop up its economy.
Business activity in the UK has fallen this month to its lowest level since January 2021 due to the cost of living crisis and rising interest rates.
“The downturn may already have begun,” Ana Andrade of Bloomberg Economics said in a note on the UK.
“We suspect that this measure, which the Bank of England looked at prior to its September decision, played a significant role in the decision to keep rates unchanged.”
Governments like the UK that borrowed heavily during the pandemic are now dealing with much higher interest rates and facing liquidation.
The cost of servicing the U.S. federal debt jumped 25% in the first nine months of the fiscal year, according to data through June.
The US and UK are far from alone.
The IIF forecasts that global debt as a share of gross domestic product will reach 337% by the end of 2023, well above pre-pandemic levels and largely driven by budget shortfalls. For Ares’ Arrogeti, the main source of concern is not monetary policy, but what will happen on the fiscal side.
“Globally, the big risk right now is clearly what happens with deficit spending,” he said.
“The risk of making a mistake there is greater.” — Bloomberg