NO ESCAPE FROM THE SEISMIC WAVE OF DEBTIIF: The pandemic has caused the global debt to rise to 363% of the global GDP

Călin Rechea (TRANSLATED BY COSMIN GHIDOVEANU)
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IIF: The pandemic has caused the global debt to rise to 363% of the global GDP

In the first nine months of this year, the global debt increased by more than $ 15 trillion compared to the end of last year, to about $ 273 trillion, while the global economy contracted by more than $ 5 trillion, reaching $ 75 trillion, according to the latest Global Debt Monitor report from the Institute of International Finance (IIF).

The last period of relative capping of the nominal value of global GDP has been manifested since 2018, amid accelerated debt growth, which raises a big question mark over the effectiveness of economic stimulus by increasing lending.

Under these conditions, the global debt reached almost 273 trillion dollars in Q3 2020, which represents about 363% of global GDP, as analysts at IIF show in the report entitled "Attack of the Debt Tsunami".

The 40.7 percentage points increase of global debt relative to GDP YOY was mainly caused by the 16.1 percentage points rise in government debt, up to 104.8% of global GDP, and an increase of 11.1 percentage points in the debt of non-financial companies, up to 103% of GDP.

The forecast of IIF analysts for the end of this year predicts a global debt increase to $ 277 trillion, or 365% of global GDP.

The combined debt of developed economies rose to $ 196.3 trillion in Q3 2020, up 14.4 trillion YOY, while emerging economy debt reached $ 76.4 trillion, up $ 5.55 trillion over Q3 2019.

Relative to GDP, accumulated debt in developed economies increased by 48.6 percentage points over the same period, to 432%, and accumulated debt from emerging economies increased by 27.5 percentage points, to 248.4%.

The rise in debt from emerging economies was driven solely by advances on loans to non-financial companies in China, whose face value exceeded $ 23 trillion in Q3 2020, amid an annual increase of 13.4%. Government debt in China rose at an annual rate of 22.2% to $ 8.8 trillion, and household debt rose at an annual rate of 12.7% to $ 8.35 trillion.

A recent report from Bloomberg shows that China's corporate credit market, especially the bond segment, is increasingly risk averse, also reflected in the significant increase in financing costs, amid rising numbers of large companies defaulting.

Tensions have also intensified in the government bond market, where November was the seventh consecutive month were prices dropped, due to uncertainties over the evolution of monetary policy.

Excluding China's debt, the combined debt of emerging economies fell to $ 29.3 trillion in Q3 2020, from $ 31 trillion in Q4 2019, with dynamics largely driven by the depreciation of national currencies against the US dollar.

Estimates of IIF economists show that the combined debt of the US economy will increase by about $ 9 trillion in 2020 compared to the previous year, to about $ 80 trillion.

Eurozone debt exceeded the $ 53 trillion threshold in Q3 2020, after an increase of 2.7 trillion YOY, amid a $ 1.62 trillion increase in government debt.

On a global sectoral level, the largest annual increase of $ 8.4 trillion was in government debt, which reached $ 77.6 trillion (104.8% of GDP), while the debts of non-financial companies increased by 6 trillion dollars, to 79.6 trillion (103% of GDP).

Household debt increased by 2.1 trillion dollars compared to Q3 2019, to 49.2 trillion (65.3% of GDP), and financial sector debt increased by 3.5 trillion, to 66, 3 trillion, respectively 90.2% of global GDP.

The highest household indebtedness was seen in Switzerland (135.7% of GDP), Canada (118.4%), Denmark (117%), Australia (115.1%), Norway (110.9%) and New Zealand (103.7%).

This year's largest increases in the debt of non-financial companies occurred in Canada, Japan and the United States. In emerging economies, the largest increases in this sector were recorded in Lebanon, China, Malaysia and Turkey.

The IIF report describes the increase in debt of non-financial companies in China, from 150% of GDP in Q3 2019 to about 165% of GDP in Q3 2020, as "amazing".

Of the countries included in the IIF analysis, only Ireland recorded a decrease in the share of total debt in GDP, as the decline in the accrued debt of households and non-financial corporations offset the advance of government debt.

A particularly worrying point highlighted by IIF analysts is the growing debt burden for emerging economies, despite declining financing costs, as there is an accelerated decline in revenues. The phenomenon is present both at the level of government debts and at the level of debts of non-financial companies.

According to estimates from IIF, 7 billion in emerging economies debt will reach maturity at the end of 2021, and the need for refinancing for loans granted in US dollars is about 15% of that amount.

The analysis in the Global Debt Monitor report also shows that in the last four years there has been a record increase in global debt, of about 52 trillion dollars, of which 15 trillion this year alone. Over the previous four years, the cumulative increase was about $ 6 trillion.

This has led to the situation where "there is significant uncertainty about how the degree of indebtedness can be reduced without the occurrence of negative effects on future economic activity".

No, there is no uncertainty: the reduction of the degree of indebtedness should be done on the basis of the acceleration of economic activity, amid an increase in productivity, which is not possible amid the adoption of increasingly irresponsible monetary and fiscal measures, aimed at maintaining an unsustainable status quo, the result of the explosive growth in lending in the last two decades.

In the last part of the report, analysts at IIF are running an imaginary scenario on the situation in 2030, when global combined debt is estimated to reach 360 trillion dollars is estimated, 85 trillion above the current level, based on the median debt increase rate of the last 15 years.

Of course, this cannot be achieved, for the simple reason that it will be impossible to offset the imbalances accumulated in the last decade by printing money.

A scenario with a much higher probability of realization is the imminent and irremediable decoupling of the global debt from the global economy, which will force the authorities driven by delusions of grandeur to consider another form of the Great Reset, namely a jubilee of debts which would surpass the the biblical ones.

Otherwise it is too late to find another escape from the seismic wave of debt.

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15 Ian. 2021
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