IMF chief economist Pierre-Olivier Gurinchas said at a press conference on Tuesday that the US fiscal situation was "the most worrying" of any country in the world.
This is mainly due to rapid growth in government spending. According to a recent estimate by the Brookings Institution, the United States has accumulated a $1.5 trillion deficit in the first 11 months of this fiscal year.
In an interview on Wednesday, Victor Gaspar, the IMF's director of fiscal affairs, also said the US deficit was high and looked set to continue.
"With no change in policy, the debt dynamics in the U.S. are very unfavorable." "He said, adding that" the continuation of current policies implies an unsustainable fiscal path."
In September, the national debt topped $33 trillion for the first time in history. Researchers at the Wharton School at the University of Pennsylvania warn that this amounts to about 121 per cent of US GDP in 2022, and that the figure is expected to surge further in the coming years, increasing the risk that the US will default on its debt within 20 years.
Rising interest rates exacerbate debt woes
Rising interest rates add to America's debt woes. To curb inflation, the Federal Reserve has raised interest rates to their highest level since 2001. That could push borrowing costs on U.S. debt to record levels by 2025, according to Goldman strategists.
At the same time, higher interest rates are troubling corporate bond issuers. In the United States alone, more than $2 trillion in corporate debt will come due by 2024. Companies often repay debt by refinancing, or borrowing new money to pay off the old. And the Fed's aggressive rate hikes have dramatically raised refinancing costs, pushing companies into default and even bankruptcy as low-cost debt matures.
"Higher debt costs are the expected result of tighter monetary policy to contain inflation. However, the risk is that borrowers may already be in a financially precarious position, and higher interest rates could amplify these vulnerabilities, leading to a surge in defaults, "the IMF warned in a blog post on Tuesday.
Fitch Ratings estimates that the default rate on U.S. high-yield bonds is expected to reach 4.5% to 5% this year, more than six times the 0.7% default rate in 2021.
Schwab estimates that the peak in U.S. defaults and bankruptcies could come around the first quarter of 2024, as higher borrowing costs put weaker companies in financial trouble.
