Rising interest rates or expensive euros are no problem

In recent days, much attention has been paid to a forecast that the government debt could increase significantly, while the government will also pay more interest on it. Like the possible appreciation of the euro, that is something we don't have to worry about for a long time to come.

In the financial world, more is usually better: an increase is often a positive development. Consider, for example, rising employment, higher corporate profits and rising stock prices. This week, however, there is a lot of attention for two increases that could turn out less favourable. In the first place, the CPB concluded after calculating the coalition agreement that the government debt could expand considerably in the future.

As a result of high expenditure on tackling major problems in areas such as climate and nitrogen, the government debt will rise to 92% of GDP in 2060, according to the CPB. That is a lot more than the 57,7% where our country according to the million dollar bill will be released this year. The level is also well above the 60% prescribed by European fiscal rules.

Growing government debt, rising interest rates
The second rise that, according to some news reports, could turn out less favorable is that of bond market yields. The yield on ten-year government bonds has been just above 0% since last week. The Netherlands therefore no longer receives money when it borrows money.

The combination of a growing government debt and rising interest rates quickly raises the specter of interest charges that are skyrocketing. It can't hurt to put that into perspective. According to the budget of millions, the Netherlands will lose €2022 billion in interest costs in 3,4. That is less than 1% of the total budget, or less than €200 per Dutch person.

National debt in perspective
In addition, Dutch government bonds have an average remaining term of eight years. Even if interest rates suddenly skyrocket, that does not immediately translate into much higher interest charges. In addition, government debt compares very well with that of other European countries. In Belgium and France this ratio is more than 100%.

Finally, it remains to be seen whether the world will look roughly as the CPB predicts in 2060. A lot can happen in 38 years. In 1990, for example, the economy of China was only 10% larger than that of the Netherlands. In retrospect, it's easy to say, but few people predicted at the time that the country would grow into a global economic power that might even rival the United States.

Dutch commercial spirit
Rising interest rates may result in the euro gaining some strength. Admittedly, this can be detrimental to the international competitiveness of the export sector. But the Netherlands has grown as a transit and export country mainly thanks to its commercial spirit and favorable location. If a currency advantage is to be the deciding factor for future success, a few things go wrong.

Joost Derks

Joost Derks is a currency specialist at iBanFirst. He has over twenty years of experience in the currency world. This column reflects his personal opinion and is not intended as professional (investment) advice.

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