Demand for financing leads global economic recovery toward 'wall of debt'

I suspect we're going to see more of these types of stories in the months ahead.

There is, without question, trillions of dollars of debt that will be maturing in the next few years. In addition, with virtually every government and most municipalities running fiscal deficits, there will be more need to raise capital from the bond market.

As this article from this morning's Washington Post discusses, there are generally two points of view on whether this tsunami of debt is something to be worried about.

The pessimistic view is that interest rates in general will be pushed higher, especially for lower quality borrowers, as massive amounts of debt need to be funded:

"There will be a tightening of financial conditions," said Mohamed El-Erian, chief executive at bond-fund manager Pimco. He said his company expects that governments, corporations and leveraged buyout firms will all have to cope with stiffer requirements as they refinance maturing bonds, "some of which will not be refinanced on any terms."

Then there is the more optimistic view, which says that the funds from the bonds that will be maturing need to be invested somewhere, and that probably will be in new bond issues:

Some analysts play down the risk, arguing that the low-interest-rate policy pursued by the U.S. Federal Reserve effectively pulls down rates across a variety of markets -- including for some corporate debt. Corporations and banks have comparatively large cash reserves, they note, and investors who shun equity markets may put money into well-rated corporate, government or financial bonds.

Even with the large amounts of government bonds to be sold, it was unlikely that the total demand for credit would outstrip supply by so much that interest rates are forced appreciably higher, said Larry Kantor, head of research for Barclay's Capital.

In general I am in the more optimistic camp. There is simply too much money chasing yield in a deflationary world. Moreover, ever since the U.S. government starting running huge deficits in the 1970's, there has always been this worry about governments "crowding out" private sector capital needs, but this never really came to pass.

Demand for financing leads global economic recovery toward 'wall of debt'