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Investing.com -- U.S. bond giant PIMCO believes future economic downturns will rely more on central bank interest rate cuts than government spending due to high global public debt in developed markets.
The California-based investment firm, which manages $2 trillion, noted that while U.S. lawmakers debate a tax bill expected to add trillions to the national debt and European governments plan increased spending, fiscal space has become limited as interest rates have risen.
"Before the pandemic, when interest rates were low, fiscal space was ample and monetary policy space limited; now, when interest rates are higher, fiscal space is limited and monetary policy space ample," PIMCO economist Peder Beck-Friis wrote in a Wednesday note to clients.
PIMCO expects bond investors will demand higher yields for long-dated debt due to increased bond issuance, leading to steepening yield curves. Despite these challenges, the firm sees little risk of an imminent debt crisis.
The investment firm pointed out that in the U.S., interest payments now make up nearly 14% of all government spending. Similar increases in debt-servicing costs have historically led to fiscal tightening, as seen after World War Two and during the Reagan and Clinton administrations.
Beck-Friis added that while debt dynamics "appear fragile in a few countries, perhaps more so than before," these issues are "chronic, not acute – unlikely to trigger a sudden fiscal crisis."
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