The US debt situation is looking increasingly precarious, and corporate defaults are up as interest rates stay high, according to the International Monetary Fund.
The US's fiscal situation is the "most worrying" among all world countries, the IMF's research director Pierre-Olivier Gourinchas said in a press briefing on Tuesday.
That's largely due to the rapid pace of government spending, with the US already having racked up a $1.5 trillion deficit in the first 11 months of the fiscal year, according to a recent Brookings Institution estimate.
And in an interview with Bloomberg on Wednesday, IMF Fiscal Affairs director Vitor Gaspar also said US deficits are elevated and look to be persistent.
"Under unchanged policies, debt dynamics in the US are very unfavorable," he said, later adding that the "the perpetuation of current policies entails an unsustainable fiscal path."
The total federal debt blew past $33 trillion for the first time ever this year. That amounts to around 121% of 2022's GDP, but that is projected to blow up in the coming years, with the added risk that the US could default on its debt in as soon as 20 years, Penn Wharton School researchers warned.
That future spells trouble in the backdrop of rising interest rates, with rates now at their highest level since 2001 as the Fed keeps a hawkish eye on inflation. That could raise the borrowing costs on US debt to a new record by 2025, Goldman Sachs strategists said.
Higher rates are also bound to spark some distress for borrowers, with over $2 trillion of corporate debt set to mature in the US alone in 2024.
"Making debt more expensive is an intended consequence of tightening monetary policy to contain inflation. The risk, however, is that borrowers might already be in precarious positions financially, and the higher interest rates could amplify these fragilities, leading to a surge of defaults," the IMF warned in a blog on Tuesday.
Corporate debt defaults have already been rising globally, notching their highest monthly increase in August, according to S&P Global data.
Meanwhile, defaults on US high-yield bonds are expected to notch 4.5%-5% this year, according to an estimate from Fitch Ratings, more than six times the 0.7% default rate recorded among all high-yield bond issuers in 2021.
Peak defaults and bankruptcies in the US could come as soon around the first quarter of 2024, Charles Schwab estimated, as higher borrowing costs break weaker firms financially.
