World’s Largest Economies Face $7.6 Trillion of Maturing Government Debt in 2012

The world’s leading economies are facing more than $7.6 trillion of maturing government debt this year as borrowing costs rise for most.

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Group of Seven nations, as well as Brazil, Russia, India, and China — collectively known as BRIC — will see $7.6 trillion in government debt maturing in 2012, up from $7.4 trillion at this time last year.

Ten-year bond yields are forecast to be higher by year-end for at least seven of the countries, as investors demand higher compensation to lend to countries that struggle to finance increasing debt burdens as their economies slow.

As Europe’s debt crisis continues to spread, the U.S. struggles to reduce a budget deficit in excess of $1 trillion, and China’s property market cools, the International Monetary Fund has cut its global growth forecast this year to 4 percent from a prior estimate of 4.5 percent.

The total amount needing to be refinanced is more than $8 trillion when interest payments are included. Though most of the world’s biggest debtors had little trouble financing their debt load in 2011, that may change in 2012.

Italy auctioned just 7 billion euros of debt on December 29, falling short of the 8.5 billion euros targeted, as the economy continued to sink into its fourth recession since 2001. The country must refinance about $428 billion of securities coming due this year, with another $70 billion in interest payments.

Italy’s maturing debt load comes in third among the world’s major economies, behind Japan with $3 trillion and the U.S. with $2.8 trillion.

Borrowing costs for G-7 nations — the U.K., France, Germany, Canada, Japan, Italy, and the U.S. — will rise as much as 39 percent for 2011, according to Bloomberg surveys, while the yields on China’s benchmark 10-year notes will likely remain little changed, and India’s will fall from 8.39 percent to 8.02 percent.

After Italy, France has the most debt coming due, at $367 billion, followed by Germany at $285 billion, Canada at $221 billion, Brazil at $169 billion, the U.K. at $165 billion, China at $121 billion, and India at $57 billion. Russia has the least amount of debt maturing at $13 billion.

While the two biggest debtors, Japan and the U.S., have had little trouble attracting demand, such is not the case for most of Europe, where the buyer base has shrunk at the same time that the supply coming to the market is increasing.

The U.S. benefits from the dollar’s role as the world’s primary reserve currency, while Japan benefits by having a surplus in its current account, which means the nation doesn’t have to rely on foreign investors to finance its budget deficits.

Japan’s benchmark yields are the second-lower in the world after Switzerland at less than 1 percent, even though its debt is about twice the size of its economy.

The U.S. drew an all-time high bid-to-cover ratio of 9.07 for $30 billion of four-week bills auctioned on the Tuesday before Christmas, even though they pay zero percent interest. The U.S. attracted $3.04 for each dollar of the $2.135 trillion in notes and bonds it sold last year.

However, yields on 10-year Treasuries are below 2 percent, while the U.S. pays an average rate of about 2.18 percent on its outstanding debt, which has investors skeptical that bond will be able to stage another rise like last year’s 9.79 percent gain.

Central banks have been bolstering demand by either keeping down interest rates or purchasing bonds.

The U.S. Federal Reserve has pledged to keep the target rate for overnight loans between banks between zero and 0.25 percent through mid-2013, and is now selling $400 billion of short-term bonds, the proceeds from which it will invest in longer-term Treasuries.

The Bank of Japan has kept its key interest rate at or below 0.5 percent since 1995, and last year expanded its asset-purchase program to 20 trillion yen. The Bank of England kept its rate at a record 0.5 percent last month, and left its asset-buying target at 275 pounds. The European Central Bank reduced its main refinancing rate twice last quarter, from 1.5 percent to 1 percent, and allotted 489 billion euros of three-year loans to euro-area lenders that could use the money to buy government bonds.

“The market is now flush with liquidity after measures taken by central banks, particularly the ECB, and that’s great news for risky assets,” said Fabrizio Fiorini, chief investment officer at Aletti Gestielle SGR SpA in Milan. “The market will have no problem taking down supply from countries like Spain and Italy in the first quarter. In fact, they should be able to raise money at lower borrowing costs than what we saw in recent months.”

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To contact the reporter on this story: Emily Knapp at staff.writers@wallstcheatsheet.com

To contact the editor responsible for this story: Damien Hoffman at editors@wallstcheatsheet.com