Goldman Sachs Warns Fiscal Deficits and Weak Growth Are Driving Global Borrowing Costs Higher

Goldman Sachs International co-CEO Anthony Gutman has called for a more stable policy environment, lower government spending and stronger economic growth to contain rising borrowing costs across major Western economies, warning that elevated government bond yields are becoming a growing constraint for policymakers and businesses.

Speaking to CNBC’s “Squawk Box Europe” on Monday, Gutman said recent turbulence in U.S. Treasurys and French government bonds reflected a broader problem facing developed economies as governments contend with high fiscal deficits, energy costs and uncertainty in labor markets.

“We all know what’s driving it. We’re focused on energy costs, we’re focused on the labor market. But fundamentally, what do we need to solve this problem? We need lower fiscal deficits, and we need more durable economic growth,” Gutman said.

His comments point to a difficult policy equation for governments. Higher borrowing costs can increase the expense of financing existing debt at the same time that governments are under pressure to support households, invest in infrastructure, strengthen defense spending and respond to higher energy costs. That can make it harder to reduce deficits without weakening economic activity.

The pressure is already visible in sovereign bond markets. U.S. Treasury yields moved higher on Friday despite a weaker-than-expected September nonfarm payrolls report. The benchmark 10-year Treasury yield was last around 5.2581% on Monday, about 1 basis point lower on the day.

France’s 10-year government bond yield was also higher, rising more than 1 basis point to about 4.8812%. Higher yields increase government financing costs and can feed through to corporate borrowing, mortgages and other forms of credit, tightening financial conditions beyond the sovereign debt market.

“There are always trade-offs” for governments, Gutman told CNBC’s Steve Sedgwick on the sidelines of Goldman Sachs’ “10,000 Small Businesses: How Britain Can Win” conference in London.

But he said the current fiscal environment makes those trade-offs increasingly difficult to manage.

 Fiscal Pressure Collides With Political Uncertainty

Gutman’s warning comes as governments across Europe face growing pressure to reconcile fiscal consolidation with demands for stronger economic performance. Attempts to reduce spending can weigh on near-term growth, while efforts to stimulate economies can add to borrowing requirements and potentially keep bond yields elevated.

That has created a feedback loop for heavily indebted governments. If investors demand higher yields to hold government debt, the cost of servicing existing liabilities rises. Governments then have fewer resources available for productive investment or tax relief, while the prospect of additional borrowing can put further upward pressure on yields.

Stronger economic growth offers a different route because it can improve tax revenues and reduce the debt burden relative to the size of the economy without relying entirely on spending cuts. For Gutman, the combination of lower spending and higher growth is more important than fiscal consolidation alone.

“But what I hope we’re going to see, which would give us all some comfort on that, is that combination of lower spending and higher growth,” he said.

The challenge is that stronger growth is difficult to engineer quickly, particularly when economies are already facing higher energy costs and restrictive financial conditions. Governments also face political constraints when attempting to reduce spending, especially in areas where households and businesses have become dependent on public support.

The result is an increasingly narrow path between fiscal restraint and economic expansion.

Gutman also pointed to Europe’s political cycle as an additional source of uncertainty for companies. His comments came as Spanish Prime Minister Pedro Sanchez announced plans for a snap general election on Nov. 29, adding another layer of political uncertainty to an already unsettled European policy environment.

For businesses, elections can delay decisions on taxation, regulation, public spending and investment. That uncertainty becomes more significant when financing costs are already elevated because companies must make long-term investment decisions while having less certainty about the economic and regulatory environment in which those investments will operate.

Bond Yields Are Becoming A Broader Economic Constraint

The rise in government bond yields is significant because sovereign debt markets sit at the foundation of global financing costs. When yields rise, governments pay more to borrow, but the effect extends well beyond public finances.

Corporate bond yields typically move with government benchmarks, increasing the cost of financing investment. Higher yields can also reduce the attractiveness of equity valuations, raise mortgage costs and strengthen incentives for investors to hold relatively safe government securities rather than riskier assets.

That makes the fiscal problem more than a government balance-sheet issue. Persistently high yields can constrain private-sector investment and weaken the growth that policymakers need to improve their fiscal position.

The situation also complicates the response to energy shocks. Higher energy prices can simultaneously increase inflation, weaken household purchasing power, and force governments to consider additional support measures. If those measures are financed through additional borrowing, they can add to the very fiscal pressures that are pushing bond yields higher.

Gutman’s prescription focuses on the interaction between fiscal policy and growth rather than on interest rates alone. A credible reduction in deficits could ease pressure on sovereign debt markets, while durable growth would improve government revenues and the ability to service existing debt.

Whether governments can achieve both simultaneously remains the central challenge.

The issue is crucial for countries where debt levels have risen substantially over recent years. Investors may tolerate high deficits when growth prospects are strong, and debt is viewed as manageable, but the combination of persistent deficits, weak growth and higher interest costs can change that assessment quickly.

For financial markets, the implication is that bond yields may now depend not only on central-bank policy and inflation expectations, but also on the credibility of government fiscal plans and the prospects for productivity and economic growth.

Gutman’s warning consequently goes beyond the immediate moves in U.S. and French bond markets. It highlights a broader shift in the financial environment in which governments can no longer assume that low borrowing costs will automatically return once inflation subsides.

With energy prices adding inflationary pressure, labor markets influencing wage costs, and political uncertainty complicating fiscal decisions, governments face a more demanding backdrop. Lower spending could help stabilize debt dynamics, but without stronger growth, fiscal consolidation could come at the expense of economic activity.