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IIF: THE PANDEMIC HAS LED THE GLOBAL DEBT TO 331% OF THE WORLD'S GDPThe burden of global debt is too great for a sick world

Călin Rechea
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The burden of global debt is too great for a sick world
Călin Rechea

In the last quarter of 2019, the global Gross Domestic Product increased by 3 trillion dollars compared to the same period of the previous year, amid a 12.1 trillion increase in global debt.

The latest Global Debt Monitor report from the Institute of International Finance (IIF) shows a dramatic deterioration of the situation. Given a decline in nominal global GDP by $ 2.3 trillion in Q1 2020 compared to the previous quarter, global debt increased by $ 1.2 trillion to 258 trillion. This is while the debts of the developed economies increased by 1.9 trillion, and the debts of the emerging economies decreased by 0.7 trillion dollars. This decline was mainly caused by the depreciation of national currencies against the US dollar, as shown in the GDM.

The debt to GDP ratio saw a record quarterly jump, of 10.9 percentage points, to 331.4%, up from 320.4% in the previous quarter.

The previous record of 7.9 percentage points was seen in Q1 2009, when the share of global debt in global GDP reached 299.2%, up from 291.3% in Q4 2008.

Compared to Q1 2019, global debt increased by 3.4% ($ 8.6 trillion), while global GDP decreased by 0.5% ($ 0.42 trillion).

In developed economies, debt increased by 6.6 trillion to 185.4 trillion, while the aggregated debt in emerging economies increased by $ 2 trillion to 72.6 trillion.

Under these circumstances, the shares of debt in GDP reached new records, of 391.9% in developed economies, up from 380.5% in the previous quarter, and 230% in emerging economies, from 219.9%.

The non-financial debt to GDP ratio of developed economies in GDP has reached about 320%, and the largest quarterly increases were recorded in Canada, France, the USA and Norway.

At the level of emerging economies, the non-financial sector debt to GDP ratio recorded the largest increases in China, South Korea, Turkey and Mexico.

As for the situation in Asia's largest economy, total debt could reach 335% of GDP this year, according to IIF analysts, with a 16 percentage point increase in Q1 2020, to 318%.

A positive aspect mentioned in the IIF report is the relative stability of foreign currency debt in emerging economies, at about $ 8.4 trillion in Q1 2020, which shows that, despite the pandemic, there have been no major refinancing difficulties.

However, there have been cases of accelerated growth in the foreign currency debt to GDP ratio,amid strong depreciation of national currencies. Ukraine, Chile, Mexico and Colombia found themselves in that situation.

That is also the main reason why the refinancing risk remains high. According to IIF data, emerging economy debt of about $ 3.7 trillion is set to come due by the end of this year, of which 17% is denominated in foreign currency. The countries with the biggest debt coming due are China, the United Arab Emirates and Turkey. And next year there will be large debts coming due in emerging economies, (about 4 trillion dollars), of which almost 18% is foreign currency debt.

At the sectoral level, the largest annual increase, of $ 2.5 trillion, was recorded for the debts of companies in the financial sector, which reached $ 64.3 trillion (84.3% of the GDP), while government debt rose by $ 2.4 trillion to $ 69.9 trillion (90.7% of GDP). Household debts increased by $ 1.4 trillion compared to Q1 2019, to 48.1 trillion (61.7% of GDP), and the debts of non-financial companies increased by 2.3 trillion, to 75, 6 trillion, respectively 94.7% of global GDP.

The highest household indebtedness ratio is recorded in Switzerland (132.5% of GDP), Australia (119%), Denmark (110.4%), Norway (105.4%), Canada (102.2%) and the Netherlands (99.7%).

In the next period, the debts of non-financial companies will continue to accelerate. "Against the background of abundant liquidity provided by central banks, declining interest rates for companies have led to a sharp rise in bond issues and loans," reads the IIF analysis, which estimates an aggregated amount of about $ 4.6 trillion, in Q2 2020.

The accelerated increase in the lending of non-financial companies was also accompanied by an equally quick increase in the number of insolvency cases.

IIF estimates that the amount of corporate bonds rose to a new record in Q2 2020 ($ 94 billion), which represents 5.5% of the amount of new issues. Corporate bonds issued in the USA represent 75% of the total number of default cases, and the next positions in the ranking are held by the Eurozone (14%) and China (3%).

The report from the Institute of International Finance warns that the global debt advance has accelerated in Q2 2020, according to preliminary data, which shows the launch of government incentive programs of 11 trillion dollars plus other programs under approval, with a value of about 5 trillion dollars.

These were financed by loans and bond issues with an aggregated value of 12.5 trillion dollars, of which about 60% are government loans. Despite this extraordinary debt dynamic, the GDM report points out that over 92% of global government credit still has an investment rating.

In the previous report, the IIF estimated that global debt could reach 342% of global GDP by the end of this year. It seems that the forecast was extremely optimistic, given that the 330% level has already been exceeded, and preliminary data from the second quarter indicates a serious deterioration of the ratios, both against the background of explosive debt growth and as a result of the fall of nominal GDP.

When and how will it be recognized that the debt burden has become unbearable for a pandemic-affected world, especially amid severe "comorbidities" that are still "fueled" by dependence on speculative credit encouraged by central banks' cheap money policy?

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