Rising National Debt Causes Interest to Snowball... Ultimately Repaid with 'Hyeolse' (Taxpayer Money)

January Average Treasury Bond Funding Rate '2.31%'... Sharp Rise Compared to Last Year's Average (1.79%)

[Asia Economy Sejong=Reporter Son Seon-hee] The borrowing cost of government bonds has been rising since the beginning of the year. With the national debt expected to surpass 1,000 trillion won this year and the full-scale interest rate hike period coinciding, the interest to be paid from taxpayers' money is also projected to swell to the 20 trillion won range.

According to the 'February Fiscal Trend' recently announced by the Ministry of Economy and Finance on the 20th, the average borrowing cost of government bonds in January was 2.31%, a sharp increase of 0.21 percentage points from the previous month (2.10%). Compared to last year's annual average borrowing cost of 1.79%, the gap has widened further.

The Ministry explained that the rise in government bond borrowing costs was due to "an accelerated shift in domestic and international monetary policies and caution over the National Assembly's discussion of the supplementary budget (Chugyeong)," resulting in a significant increase compared to the end of the previous year. Over the past two years, major countries worldwide mobilized fiscal policies to respond to the COVID-19 crisis, but from this year, they have shifted their stance to 'fiscal normalization' and tightened policies. Nevertheless, the National Assembly has insisted on preparing a massive supplementary budget ranging from 35 trillion to 50 trillion won, which has further unsettled the bond market already shaken by the interest rate hike phase.

The interest expenditure for government bonds has consistently remained between 16 trillion and 18 trillion won from 2011 to 2020. It then recorded about 19.3 trillion won last year, and this year it is expected to exceed 20 trillion won for the first time.

The government has traditionally prepared the related budget for government bond interest payments somewhat generously each year. It assumed new government bond issuance rates of 3.5% in 2019, 2.6% in 2020, and 2.4% in 2021, and prepared the interest budget accordingly. During this period, the actual average borrowing costs were 1.68% in 2019, 1.39% in 2020, and 1.79% in 2021. Since a failure to pay interest would be fatal to national credit, the government conservatively estimated borrowing costs. As a result, the related interest budget was spent less than the government’s allocation each year, leading to unused funds exceeding 1 trillion won for three consecutive years recently. The National Assembly has consistently pointed out that the government should make more accurate estimates, and the government bond interest budget has often been a regular target for cuts during the National Assembly’s review.

However, this year is different. Even though it is still early in the year, the average borrowing cost has already reached the low to mid 2% range, and further base rate hikes are anticipated. An unprecedented 'January supplementary budget' has been prepared, and with the next government taking office in May, there is speculation that a large-scale second supplementary budget may be prepared in line with new national policy tasks. While some resources may be secured through expenditure restructuring, additional deficit bond issuance is ultimately expected to be unavoidable.

The government set the average borrowing cost at 2.6% this year and prepared the related budget accordingly. There are concerns that if full-scale interest rate hikes occur and government bond issuance volume increases, the bond market could become even more volatile. Interest rates could soar to levels that pressure the government’s expected borrowing cost.

Last month, the government bond bid-to-cover ratio was 277%. This is slightly lower than last year’s annual bid-to-cover ratio of 283%. Inside the Ministry of Economy and Finance, a bid-to-cover ratio of around '300%' relative to issuance volume is considered very stable. Although there are signs of a slight decline, it is still judged to be managed at a satisfactory level. However, if the bid-to-cover ratio falls further and volatility increases, it would mean that the market is struggling to absorb the government bond issuance volume, warranting caution.

If the government fails to pay interest on issued government bonds for a certain period, it would mean a 'national default.' Of course, if market volatility increases, the government would take stabilization measures such as bond buybacks, and if interest payments remain difficult, it would respond by issuing fiscal securities, so the likelihood of such a worst-case scenario is low. Nevertheless, given the significant external economic uncertainties, the government’s internal tension regarding the bond market is growing.

The National Assembly Budget Office stated in its comprehensive analysis report on this year’s budget proposal, "Recent global economic recovery expectations, rising U.S. Treasury yields, and the Bank of Korea’s base rate hikes will increase the borrowing costs of government bonds issued in the future, leading to a rise in government bond interest burdens." It added, "Given the increase in national debt size and recent interest rate trends, there is a possibility that the interest burden on national debt will increase, so fiscal policy authorities need to exercise caution."

This content was produced with the assistance of AI translation services.