How the world racked up $307 trillion in debt amid the pandemic – and what it means for you

The global debt stock reached a new record high of $307 trillion in the second quarter of 2023, as governments, corporations, and households borrowed heavily to cope with the economic fallout of the Covid-19 pandemic. The increase has pushed the global debt-to-GDP ratio to 336%, the second consecutive quarterly rise, according to a report by the Institute of International Finance (IIF).

Who is borrowing and why?

The IIF report stated that global debt in dollar terms rose by $10 trillion in the first half of 2023 and by $100 trillion over the past decade. The report said that more than 80% of the latest debt build-up came from the developed world, with the US, Japan, Britain, and France registering the largest increases.

The report attributed the surge in debt to the unprecedented fiscal and monetary stimulus measures taken by governments and central banks to support their economies amid the pandemic. The report also cited slower growth and lower inflation as factors behind the rise in debt ratios.

Among emerging markets, the biggest rises came from the largest economies, namely China, India, and Brazil. The report said that these countries faced challenges such as currency depreciation, capital outflows, and higher borrowing costs due to rising global interest rates.

What are the risks and implications?

The report warned that the high and rising debt levels have created a slow-burning crisis, with countries increasingly vulnerable to future shocks. The report said that higher interest rates and higher debt levels have pushed up debt service costs, prompting concerns about the sustainability and stability of the global debt burden.

The report also highlighted some of the potential risks and implications of the growing debt pile, such as:

• The risk of a sudden spike in inflation could erode the value of debt and force central banks to tighten monetary policy faster than expected.
• The risk of a disorderly unwinding of debt could trigger financial market turmoil and contagion across countries and sectors.
• The risk of a sovereign debt crisis, especially in low-income countries that have limited access to external financing and face high debt distress.
• The risk of social unrest and political instability, as high debt levels could limit fiscal space for public spending on health, education, and social protection.
• The risk of environmental degradation and climate change, as high debt levels, could hamper green investment and transition efforts.

What can be done to address the problem?

The report called for a coordinated and comprehensive approach to tackle the global debt challenge, with the involvement of policymakers, regulators, creditors, and borrowers. The report suggested some of the possible steps that could be taken to address the problem, such as:

• Enhancing debt transparency and data quality, especially in emerging markets and developing countries, to improve debt management and monitoring.
• Strengthening fiscal rules and frameworks, to ensure fiscal discipline and sustainability across countries and levels of government.
• Promoting responsible lending and borrowing practices, to avoid excessive leverage and over-indebtedness.
• Implementing debt restructuring mechanisms, to facilitate timely and orderly resolution of debt distress cases.
• Supporting green finance initiatives, to mobilize resources for low-carbon and climate-resilient development.

This post How the world racked up $307 trillion in debt amid the pandemic – and what it means for you was originally published at Finance Crave