Global debt implications

Global debt soared by a whopping $24 trillion to an all-time record of $281 trillion, or 355 per cent of gross domestic product (GDP) in 2020.

Massive government aid and the decline in state and corporate revenues caused the borrowing surge. The total was above earlier estimates, according to the Institute of International Finance (IIF).

The increase was well beyond the rise seen during the 2008 global financial crisis. Interest rates have fallen since then, but the question is how the debt will be repaid as higher taxation would crimp much-needed economic growth.

Source:- The Business Times Singapore

Several economists believe that governments will allow inflation to reduce real debt levels in coming years, but that would take a lengthy time.

Lacy Hunt, chief economist at Hoisington Investment Management Company contends that high debt levels will crimp long-term growth.

In the short term, it can counter financial strain and boost activity; but in the longer term, extensive debt is a burden on households, he said.

The financial position of highly-leveraged, over-borrowed businesses gives them less leeway to spend capital on job-creating direct investment in factories, plant and equipment.

Extensive debt thus raises unemployment rates over the long term, Mr Hunt said.

Breakdown of debt

The IIF’s debt estimates are based on information pulled from 61 countries.

Such was the pandemic-induced debt that the increase in total borrowing accounted for over a quarter of the $88 trillion rise over the past decade. Debt outside the financial sector rose by $20 trillion during the year to $214 trillion.

Non-financial private sector debt (household and corporate) of the 61 nations reached 165 per cent of global GDP in 2020, up from 124 per cent in 2019. Financial corporates had the largest annual jump in debt ratios in over a decade.

The IIF estimates that the UK’s government debt reached 133.1 per cent of the country’s GDP at the end of 2020, with non-financial corporates at 78.9 per cent, the financial sector at 202.4 per cent, and households at 91.4 per cent of GDP.

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The IIF is concerned that growing “corporate zombification” is taking hold. Government guarantees and debt moratoria to date have been successful in preventing a surge in business bankruptcies, it said.

But premature withdrawal of supportive government measures could mean a surge in insolvencies and a new wave of non-performing loans.

Inevitably, there would be financial stability implications for the banking sector. A prolonged period of loan guarantees – coupled with sustained low interest rates – could encourage more debt accumulation by the weakest and most indebted corporations.

European countries – notably France, Spain, Greece, the UK and Italy – experienced some of the biggest increases in debt ratios in 2020. Switzerland was the only mature market economy to record a modest decline in government debt ratio.

Emerging market debt topped 250 per cent of GDP in 2020, up from 220 per cent in 2019. The biggest increases took place in Brazil, South Korea, Turkey, the United Arab Emirates and China.

There is a greater reliance on borrowing domestic currency instead of US dollars, yen and euros because of foreign exchange risk. The IIF estimated that emerging bonds and loans equivalent to US$10 trillion must be repaid in 2022.

© Neil Behrmann. This article was first published in The Business Times Singapore . For other Asian and global articles try https://subscribe.sph.com.sg/publications-bt/

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