Why the World Is Watching U.S. Interest Rates

(Bloomberg View) -- With U.S. short-term interest rates headed toward their highest levels in almost a decade, here’s something worth considering: The rest of the world has borrowed so many dollars that the global repercussions could be greater than ever.

Events of the past several weeks have helped convince markets that a long period of extremely low interest rates might finally be coming to an end. Congress has approved hundreds of billions of dollars in tax cuts and spending increases, at a time when inflation and wage growth suggest that the economy is already heating up. As a result, investors increasingly expect the Federal Reserve to tighten monetary policy: Prices in futures markets, for example, imply that the central bank’s short-term interest-rate target will rise to 2 percent by December, a quarter percentage point more than what was expected three months ago. Here’s how that looks:

Within the U.S., higher rates might help the economy avoid overheating. But they’ll also have an effect abroad, where governments and companies have accumulated an unprecedented pile of dollar-denominated debt (which has kept growing since I looked at it several months ago). As of September, the total dollar obligations of non-bank entities outside the U.S. stood at $11 trillion, according to the Bank for International Settlements. As a percentage of non-U.S. gross domestic product, that’s up 60 percent from 2004, the last time the Fed embarked on a series of interest-rate increases. Here’s a chart:

All those borrowers will face bigger interest payments (unless they’ve locked in longer-term rates or can refinance into other currencies). How that plays out will depend on how financially stretched they are. Although China’s dollar-denominated debt, at $523 billion, amounts to only about 2 percent of the country’s GDP, it’s still plenty to cause trouble for foreign lenders if Chinese borrowers can’t pay up (albeit by some measures they’re looking stronger than they have been). Saudi Arabia’s ample oil revenues should render it capable of handling dollar debts amounting to almost 6 percent of GDP, but bigger interest payments could place added strains on its already large budget deficit.

In any case, if and when the Fed hits the brakes in the U.S., it will also be doing so globally to a greater extent than before.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Mark Whitehouse writes editorials on global economics and finance for Bloomberg View. He covered economics for the Wall Street Journal and served as deputy bureau chief in London. He was previously the founding managing editor of Vedomosti, a Russian-language business daily.

To contact the author of this story: Mark Whitehouse at mwhitehouse1@bloomberg.net.

To contact the editor responsible for this story: James Greiff at jgreiff@bloomberg.net.

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