LIVE MARKETS-No fiscal crisis, just episodic volatility - PIMCO

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NO FISCAL CRISIS, JUST EPISODIC VOLATILITY - PIMCO

Fiscal policy is under scrutiny as Germany loosens its fiscal rules, the U.S. tax and spending bill advances through Congress, and several European countries announce plans to boost military spending.

“These issues seem chronic, not acute – unlikely to trigger a sudden fiscal crisis. Instead, we expect episodic market volatility, possible further steepening of the yield curve, and governments to eventually address deficits via tighter fiscal policies,” says Peder Beck-Friis, an economist at PIMCO, referring to high levels of debt.

“Fiscal deficits vary widely by country but, in aggregate across developed economies, look set to stay roughly flat in the coming years, barring a recession,” he adds.

“Many recent easing measures simply offset earlier plans to tighten budgets. In countries with limited fiscal space, higher military spending will likely be balanced by cuts elsewhere or higher taxes.”

According to PIMCO, most euro area countries, as well as the Nordics, Australia, New Zealand, and Switzerland, have debt levels that are too low to threaten fiscal credibility.

A few, such as the U.K. and Italy, face a more fragile outlook, but their debt appears broadly sustainable if they follow through on planned fiscal tightening.

Three countries stand out – the U.S., France, and Belgium – where debt is on an ever-increasing path under current policies.

(Stefano Rebaudo)

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