Financial mathematics on a planetary level - trillions have become chump changeA debt of $281 trillion cannot be stabilized with a GDP of $79 trillion

Călin Rechea
English Section / 18 februarie

A debt of $281 trillion cannot be stabilized with a GDP of $79 trillion

IIF: The pandemic has caused an explosive increase in debt. Will stabilization follow?

The global debt has increased 24.1 trillion dollars în 2020, amid extraordinary programs to combat the coronavirus pandemic, amid a decline of nearly $ 1 trillion in Global Gross Domestic Product, according to the latest Global Debt Monitor (GDM) report from the Institute of International Finance (IIF) (see chart 1).

A debt of $281 trillion cannot be stabilized with a GDP of $79 trillion

The cumulative value of the global debt exceeded 281 trillion dollars, a level about 4 trillion dollars higher than the forecast from the Institute of International Finance three months ago, amid an increase in non-financial sector debt by 20 trillion dollars, up to 214 trillion.

The increase in global debt in 2020 represents almost 25% of the increase in debt in the last decade, of about 88 trillion dollars, according to the report from IIF.

The authors of the analysis warn that there are still no signs of this trend of accelerated debt growth stabilizing, given that the ratio between global debt and global GDP increased by 35 percentage points over the previous year, and exceeded 355%.

The record advance of 35 percentage points was driven by a 17.1 percentage point increase in government debt to 105.8% of global GDP, and an 8.2 percentage point increase in non-financial corporation debt to 100.1% of GDP. Cumulative government debt increased by more than $ 12 trillion in 2020, after an increase of $ 4.3 trillion in 2019.

Household debt increased to 64.4% of the GDP in Q4 2020, from 60.4% in the same period of the previous year, and financial companies' debt increased by 5.1 percentage points to 85.9% of the GDP.

Forecasts from the IIF economists show that government debt will increase by about $10 trillion this year, and will exceed $ 92 trillion by the end of the year.

Moreover, "social and political pressures may limit governments' efforts to reduce budget deficits and public debt, which will call into question the ability to cope with future crises," the Global Debt Monitor said.

Cumulative debt of developed economies rose to $ 203.7 trillion in Q4 2020, up from $ 182.8 trillion YOY, while emerging economy debt rose by $ 3.1 trillion to 77.7 trillion (see chart 2).

A debt of $281 trillion cannot be stabilized with a GDP of $79 trillion

Compared to the GDP, debts accumulated in developed economies increased by 37.3 percentage points over the same period, up to 418.9%, and accumulated debts in emerging economies increased by 30 percentage points, up to 250.6%.

Cumulated government debt in developed economies rose to 130.4% of GDP and $ 63.5 trillion, respectively, from 109.7% in the previous year. The increase is equivalent to $ 10.7 trillion.

US government debt rose 25.3 percentage points to 128.6% of the GDP, and total debt rose to 371.6% of the GDP, from 331.5%.

Amid strong economic contraction, total indebtedness has risen massively, especially in France, Spain and Greece, according to the IIF report.

Total debt in the euro area reached 422.1% of GDP, from 382.8% in the previous year, as government debt rose by 21.9 percentage points to 120.4% of the GDP.

Amid strong economic contraction, total indebtedness has risen massively, especially in France, Spain and Greece, according to the IIF report.

Cumulative government debt from emerging economies rose to 63.5% of GDP and $ 18.8 trillion, respectively, from 52.4% in 2019, an increase equivalent to $ 1.5 trillion.

The total indebtedness of emerging economies in Asia rose to 298.3% of GDP, from 266.3%, as government debt rose to 66.2% of GDP, from 54.2% , and the debts of non-financial companies increased by 12.2 percentage points, to 131% of GDP.

The GDM report from IIF also points out that the debt of the private non-financial sector (companies and households) reached 165% of GDP in 2020, up from 124% in 2019, amid government support measures and the introduction of debt moratoriums.

In terms of the indebtedness of companies in the financial sector, the increase was the highest in the last 13 years, while also being the first increase since 2016.

The increase in indebtedness of non-financial companies has been accompanied by "accumulation of balance sheet vulnerabilities in many countries, especially France", and the IIF report also mentions another serious phenomenon, that of the accelerated growth of the number of zombie companies, which are kept alive only by government support programs and particularly low funding costs.

"Government guarantees and moratoriums on debt payments have prevented the explosive rise in bankruptcies," the report said, adding that "the decline in the number of insolvency cases has been extraordinary in many European countries."

The problems that will arise with the cessation of government programs will also be extraordinary. "The premature withdrawal of support measures could lead to an explosive increase in the number of insolvencies and the emergence of a new wave of non-performing loans, with special implications for the stability of the banking system," warn economists at the IIF.

Unfortunately, systemic risk will also be exacerbated if government financial support programs for private sector firms are maintained, as "extending the period of granting credit guarantees, amid low interest rates, may encourage debt accumulation at the level of the most fragile and more indebted companies".

Economists at IIF ask in the GDM report whether debt stabilization will follow in the next period. Unfortunately, this is an impossible task even for a fully normalized global economy, given that a financialized economy cannot be cured by a vaccine because there is no "vaccine" for the "virus" of over-indebtedness.

Călin Rechea

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