ALEX BRUMMER: Global threat of war debts as G7 borrowing spirals out of control

The gathering of US warships in the eastern Mediterranean and Britain’s decision to send surveillance planes and other military assets to the region reflect concerns about a wider conflagration.

All attention rightly focused on the terrible atrocities committed by Hamas and the exodus of civilians from northern Gaza.

The greater geopolitical risk lies on Israel’s border, where Hezbollah terrorists operating in Lebanon and Syria are armed with advanced missiles using laser-guided Iranian technology.

The threat of a wider war and the need for the US, Britain and others to increase defense spending in a region of strategic importance are likely to intensify.

The timing for most Western governments could not be more difficult.

The impact of three shocks – the Great Financial Crisis of 2008-2009, Covid-19 and Russia’s war on Ukraine – has sent G7 sovereign debt and debt into the stratosphere.

This comes at a time when central banks’ belated efforts to curb inflation are causing debt repayments to rise.

Budget problems are largely responsible for the bond sell-off, causing interest rates to rise. In the US, the budget deficit has risen to $1.7 trillion in the 2022-2023 budget year, which has just ended.

Factoring in the impact of student loan cancellation efforts, the impact is estimated at nearly $2 trillion.

Both the US and Britain now have debt levels approaching 100 percent of national output, joining the hapless G7 club of Italy and Japan, where it is much higher.

Even Germany has a debt-to-GDP ratio of 60 percent, which is likely to rise if the recession and higher interest payments on its debt continue.

Since the start of Russia’s invasion of Ukraine, the Biden White House, with the support of Congress, has pledged $75 billion to Kiev in defense and economic aid.

Republicans on Capitol Hill (spurred on by Donald Trump’s antics) are starting to push back against the bill. The last thing the US budget or the global economy needs is a second major front in the Middle East.

Despite the geopolitical dangers, there seemed to be some complacency during the IMF/World Bank sessions in Marrakech. This view is confirmed by a JP Morgan survey of key officials and bankers.

Interest payments on debt are rising. In the US, debt service costs are expected to rise from 2.6 percent of output in 2023 to 3.6 percent in 2033 and twice as much in 2053.

In Britain the trend is even more worrying. The situation has been made worse as the Treasury has hoisted itself onto the scaffold of index-linked bonds. German interest costs have increased tenfold to £35 billion in the past two years.

All this, and the possibility that he will have to spend more and more money on defence, makes Chancellor Jeremy Hunt’s efforts to hold out against immediate Tory demands for tax cuts in next month’s autumn statement look essential.

Hunt must not forget that a doubling of the number of middle Britons paying higher taxes to 8.9 million from 2020 to 2027-28 is a huge disincentive to work and Britain’s lagging productivity can only worsen. Freezing tax thresholds is an act of self-harm.

Musical chairs

As an early, small investor in the Hipgnosis Song Fund, you can’t help but be disappointed by lost income.

Concerns that it would breach loan agreements led the fund to cut its dividend, causing its shares to plummet.

This comes as founder Merck Mercuriadis is trying to reduce debt by selling a bundle of key assets to a Blackstone fund, also managed by Hipgnosis boss, in what is a clear conflict of interest. Among the songbooks for sale are the rights to Kaiser Chiefs, Shakira and Barry Manilow.

Key shareholder Tom Treanor of Asset Value Investors is in turmoil and wants to see a ‘terrible’ deal with Blackstone killed at a special meeting on October 26.

Less clear is Treanor’s suggestion that a vote against ‘continuation’ of the fund would simply hand control back to shareholders, who could then push for new management and reorganization rather than winding up the fund.

Either way, a board of directors led by corporate lawyer Andrew Sutch has let investors down by letting Mercuriadis’ infectious enthusiasm run wild.

Sutch joins a growing list of ineffective independent presidents.