Bond Tab Will Continue to Grow

japan-government-budgetBond Tab for Biggest Economies Seen Falling $220 Billion – Bloomberg.

This is a misleading headline by the good folks at Bloomberg. It leads the reader to believe that the largest economies will require less financing for 2013, but BBG has only done half the work necessary to reach that conclusion.

The article merely refers to maturing debt, but there is another component to a nation’s financing needs, the deficit. In addition to maturing debt, the deficit must be financed, too. Budget surpluses would actually reduce financing needs for a country, but surpluses are so 90’s, so we do not have to consider them.

These are the G7 countries in the Bloomberg Survey and the change in the projected budget deficit from 2012 to 2013:

  • United States, lower
  • Canada, lower
  • Germany, higher
  • Japan, higher
  • United Kingdom, higher
  • Italy, lower
  • France, lower

Italy’s budget deficit is projected to fall from 3.0% to 2.9%, and France’s from 4.5% to 3.4% based on some optimistic growth forecasts. From this list, the only locks to lower their budget deficits from 2012 to 2013 are the U.S. and Canada both with a lot of help from the energy sector.

Will the decrease in maturing debt be offset by larger budget deficits throughout the G7? I believe that it will not with one caveat. The Japanese situation is growing more dire by the day. Japan must now rely on foreign investors to finance its growing budget deficits due to an insufficient current account balance, increased social security spending on retirees, and decreasing government revenues as the workforce shrinks.

If Japan runs a 13% budget deficit rather than  the projected 10%, the $22obn less in maturing debt for G7 nations is completely wiped out. This is not a cause for alarm, because in the medium term the magic money machine will be able to support the increase in bond supply.

The financing needs for the G7 nations plus the BRICs will probably remain unchanged for 2013, but this question is far from settled.

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