The global debt increased by $8.3 trillion in the first quarter of the year to a near-record high of $305 trillion amid an aggressive tightening of monetary policy by central banks, the Institute of International Finance (IIF) has revealed.
According to its quarterly Global Debt Monitor (GDM) report on Wednesday, the reading is the highest since the first quarter of last year and the second-highest quarterly reading ever.
“Global debt is now $45 trillion higher than its pre-pandemic level and is expected to continue increasing rapidly,” said the IIF in the GDM.
After peaking near 360% in 2021 the debt-to-output ratio has stabilized around 335%, above pre-pandemic levels.
The IIF warned that the combination of such high debt levels and rising interest rates had pushed up the cost of servicing that debt, prompting concerns about leverage in the financial system.
The IIF also noted the growth of shadow banking, or credit intermediation from non-bank financials.
“Shadow banks now account for more than 14% of financial markets, with the majority of growth stemming from a rapid expansion of U.S. investment funds and private debt markets.”
Specifically, the report mentioned the “large portion” of corporate debt held by life insurance companies, “raising concerns over their increased exposure to less liquid assets.”
“With financial conditions at their most restrictive levels since the 2008-09 financial crisis, a credit crunch would prompt higher default rates and result in more ‘zombie firms’ – already approaching an estimated 14% of U.S.-listed firms,” the IIF said.
Despite concerns over a potential credit crunch following recent turmoil in the banking sectors of the U.S. and Switzerland, government borrowing needs to remain elevated, the finance industry body stressed.
According to the report, aging populations and rising healthcare costs continue putting strain on government balance sheets, while “heightened geopolitical tensions are also expected to drive further increases in national defense spending over the medium term,” which would potentially affect the credit profile of both governments and corporate borrowers.
“If this trend continues, it will have significant implications for international debt markets, particularly if interest rates remain higher for longer,” the IIF cautioned.
The report showed that total debt in emerging markets hit a new record high of more than $100 trillion, around 250% of GDP, up from $75 trillion in 2019. China, Mexico, Brazil, India and Türkiye were the biggest upward contributors, according to the IIF.
As for the developed markets, Japan, the US, France and the UK posted the sharpest increases over the quarter, it said.
The report partly focused on the effects of last year’s rapid rise in rates in some bank balance sheets.
“Although recent bank failures appear more idiosyncratic than systemic,” the report said, “fear of contagion has prompted significant deposit withdrawals from U.S. regional banks.”
The IIF voiced its concern that tighter lending practices among smaller banks would hurt some businesses and households harder.
“Given the central role of regional banks in credit intermediation in the U.S., worries about their liquidity positions could result in a sharp contraction in lending to some segments.”
The report showed 75% of the IIF’s emerging market (EM) universe saw an increase in debt levels in dollar terms in the first quarter, with the overall figure crossing over $100 trillion for the first time.
Some of the larger EMs have benefited from the relative weakness of the dollar, which has attracted investors to their local currency debt. But for others access to markets has been harder or non-existent on either tighter spreads as rates rose in developed markets or fast-rising borrowing costs.
“With the interest rate differential between EMs and mature markets diminishing, EM local currency debt is less appealing for foreign investors,” the IIF said.
World Economic Forum said on May 16, 2022 (What does ‘global debt’ mean and how high is it now?, https://www.weforum.org/agenda/2022/05/what-is-global-debt-why-high/):
Borrowing was already surging before the pandemic – but COVID-19 and now the war in Ukraine have pushed global debt to new highs.
About a year ago IMF warned: Countries need to work together to tackle this debt mountain in order to safeguard global stability and prosperity.
“In the end, the impact will be most sharply felt by those households that can least afford it,” it adds.
Experts warn: Low-income countries and households suffer the most from high debt levels.
Global debt is borrowing by governments, businesses and households.
In 2021, the global debt was a record $303 trillion, according to the IIF.
That was a further jump from record global debt in 2020 of $226 trillion, as was reported by the IMF in its Global Debt Database.
The current debt wave is the world’s fourth since 1970, the World Bank says.
Emerging and developing economies have been the worst hit by previous debt crises, World Bank research shows.
If countries default on their debts, it can cause panic on financial markets and economic slowdowns.
For businesses, meeting repayments on high levels of debt can mean less money is available to invest. Insolvency is also a risk for businesses that are unable to pay back their loans.
For households, high levels of debt can force them to cut some areas of spending, such as food or fuel.
When low-income countries get into debt distress, it is associated with “protracted recessions, high inflation and fewer resources going to essential sectors like health, education and social safety nets, with a disproportionate impact on the poor”, the World Bank says.
Debt distress is when a country is unable to fulfill its financial obligations, such as repayments due on its debt. The IMF and World Bank believe 60% of low-income countries are at or near this point.
As food and fuel prices soar, governments may need to give more grants to households in need to help them cover costs, particularly in low-income countries, the IMF says.