The Organisation for Economic Cooperation and Development (OECD) has warned that ratings agencies' 2013 downgrades should be taken with a grain of salt given their poor track record of sovereign risk pricing over the past two decades.
The OECD Sovereign Borrowing Outlook 2013 said ratings agencies were expected to continue to put pressure on governments this year but warned that any downgrades should be carefully scrutinised and not taken at face value.
Government borrowing amongst OECD countries would increase slightly to US$10.9 trillion in 2013, according to the report, up from the already high level of US$10.8 trillion in 2012.
The general government deficit for the OECD area is projected to decrease from an estimated 5.5 per cent of GDP (approximately US$2.6 trillion) in 2012 to around 4.6 per cent of GDP (approximately US$2.3 trillion) in 2013, while net borrowing is expected to fall to US$2 trillion this year, it said.
OECD member-country government debt ratios were expected to grow or remain high, with general government debt-to-GDP projected to reach 111.4 per cent in 2013.
It said, however, that the increase in overall debt ratios had slowed, declining from an increase of 11.5 per cent in 2008-2009 to a projected increase of 1.1 per cent in 2013-14.
The report said the combined Outright Monetary Transactions and European Stability Mechanism backstop had driven a noticeable downward influence on bond yields in peripheral markets — despite the upward pressure on funding costs and roll-over risk for sovereigns due to Euro area-induced contagion effects in 2011.
"Raising large volumes of funds at lowest cost to refinance their debt obligations will therefore remain a major challenge for many governments," the report said.
"Most OECD debt managers will continue rebalancing their portfolios by issuing more long-term bonds and cutting back on issuance of short-term bills," it said.
It said OECD governments would need to refinance about 30 per cent of outstanding long-term debt in the next three years, with the average long-term interest rate expected to increase to 4 per cent in 2013, up from 3.8 per cent in 2009.
