IMF warns short-term debt could raise government borrowing costs

The International Monetary Fund has cautioned advanced economies, the United States in particular, against leaning too heavily on short-term borrowing. According to the Wall Street Journal, the Fund said on Wednesday that such debt leaves governments exposed to rate increases sooner when inflation accelerates.

Yields on longer-dated government paper have risen in recent years, which the IMF attributed partly to heavier debt sales and partly to softer demand from central banks and other buyers who favour longer maturities. Some governments have turned to short-term instruments that generally carry lower interest, but the Fund warned that frequent inflation shocks could reverse the intended benefit. Because short-dated debt must be reissued regularly, rate hikes that central banks use to fight price pressures from a supply shock, such as the war between the US and Iran, reach borrowing costs faster.

Among G7 economies, the US has relied most on short-term Treasury bills to finance its budget deficit, while France is weighing more short-dated issuance as investors become less willing to lend for long periods. The IMF expects US interest payments to climb to 5.7% of GDP in 2031, compared with 2.8% before the Covid-19 pandemic. Globally, it estimates a primary deficit of 2.6% of GDP would stabilise debt, below the current 3.3%.