The Bond Market Is Revolting - Will There Be A Debt Crisis?

Forbes

23-05-2025

TOPSHOT - Students clash with riot police in front of the Greek Parliament during a demonstration ... More against the government's plans for private universities, in Athens, on February 1, 2024. (Photo by Angelos TZORTZINIS / AFP) (Photo by ANGELOS TZORTZINIS/AFP via Getty Images)
In 2013 President George W. Bush referred to the Greeks as 'Grecians'. At the time the 'mis-speaks' of the second Bush president provoked much amusement and some concern, though by comparison to the current occupant of the White House, the author of the disastrous invasion of Iraq is a strategic genius. The 'Grecians' came to mind this week when tuning into commentary by the Japanese prime minister Shigeru Ishiba who compared his country's fiscal situation to Greece in the early 2010's as he rejected calls for tax cuts. By the staid standard of Japanese political pronouncements this is controversial and will help draw attention to the rise in Japanese interest rates in the past two weeks.
Ishiba's comments are a harbinger of what is to come as we head into the 'Age of Debt', an era where indebtedness will dominate politics, economics and geopolitics. I have spent enough time in Greece over the years to know how brutally painful the consequences of austerity were, and how reckless economic policy had become in the late 1990's and early 2000's.
Indeed, I recall the late years of the (Andreas) Papandreou period, when the social debate in Athens revolved around his younger, second wife 'Mimi'. Papandreou was a very interesting character, and an example I often deploy to show that an education in economics is no guarantee of good policy – before he entered politics Papandreou was the Dean of the economics faculty at Stanford.
Often a finance minister will need political as well as policy skills. In his book, Stress Test, Tim Geithner, who was appointed Treasury Secretary by President Obama and who as head of the New York Fed had very good technical skills, worried aloud that he did not have the political skills for the role (arguably Robert Rubin was the master here) and the Obama team spent some time coaching him in this field.
There is a small but interesting literature on the backgrounds of finance ministers, which hypothesises that more left leaning governments (like Obama?) will choose economics experts to bolster their economic credibility, while right leaning governments often choose a finance minister with a financial services background – Donald Trump's two Treasury Secretaries, Steven Mnuchin (ex Goldman Sachs banker) and Scott Bessent (hedge fund manager who worked with George Soros for some time) fit this profile.
The point of my dragging up the cv's of finance ministers is to state that difficult times are ahead, and will require political courage and policy acumen, most of all in the US as President Trump takes aim at the budget deficit. Unfortunately, his lead policy manoeuvre on tariffs have shown that he has neither of these attributes.
In the US, President Trump has driven hard to have his budget (Big, Beautiful Bill) passed by Congress. It contains some elements that are quite sinister such as the ending of an excise tax on gun silencers, and one particular policy I agree strongly with – the introduction of MAGA (Money Account for Growth and Advancement), whereby the Treasury would create tax preferred savings accounts for children and give each one an initial deposit of USD 1,000. Europe should do the same!
However, the broad strokes of the budget look like they could rob many Americans of what they need most, notably MEDICAID. Worryingly from an economic point of view the budget is expected to add nearly USD 3.5 trillion to the budget deficit over the next ten years, according to a range of bodies from the Penn Wharton Budget Model to the Joint Committee on Taxation, and the implication is that the indebtedness of the US will rise further (estimates point to a historic debt to GDP ratio of 125% in ten years' time). The Congressional Budget Office publishes an intimidating chart that puts this in perspective and shows that the debt to GDP ratio in the US has only been higher (going all the way back to 1790) in the post-World War II period.
This is the daunting backdrop to two poor bond auctions last week (demand for US and Japanese bonds was well below the norm). In this respect, the case of Greece is instructive – notably the devastating effect of forced austerity, the difficulty in trying to make policy when a government has lost the confidence of markets and the reality that once this confidence is lost, it can take time to regain it.
Ultimately, Greece was a small economy in the scheme of things, though its membership of the euro made it systematically important. The US and Japan are on a different scale altogether.
We are all Grecians now.