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It is important to remember the strong “non-linearity†that arises when interest rates rise above the growth rate
The functioning of the economy is very different depending on whether interest rates are lower or higher than the growth rate , hence the mention of “non-linearityâ€. When interest rates are lower than the growth rate, borrower solvency improves spontaneously; but when interest rates rise above the growth rate, solvency worsens spontaneously and borrowers have to save enough to avoid a loss of solvency. A high debt ratio is therefore only a hindrance if the interest rate is higher than the growth rate. At present, interest rates lower than growth rates are the norm, so debt is not an issue; Italy is the only exception. For debt to become a problem, interest rates would have to become higher than growth rates, which could happen if: There were a recession, as interest rates are very low and could not be lowered much further. A recession would therefore be serious due to the high level of debt ratios; Certain central banks decide d to normalise monetary policy despite the high level of debt ratios.
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Based across the world’s leading financial centers, Natixis CIB Research offers an integrated view of the markets. The team provides support to inform Natixis clients’ investment and hedging decisions across all asset classes.
Patrick Artus
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