Institute of International Finance

Global debts expand 40% above 2008 financial crisis

Topping $225 trillion, the Institute of International Finance global debt monitor has shown that global debt across all sectors rose by over $10 trillion in 2019.

The Institute noted at over 322% of GDP, global debt is 40% or $87 trillion higher than at the onset of 2008 financial crisis. This, the institute stated, is a sobering realization as governments worldwide gear up to fight the pandemic.

With the COVID-19 fiscal response in full swing, the global debt burden is set to rise dramatically in 2020; IIF held.

It noted that gross government debt issuance soared to a record high of over $2.1 trillion last month, more than double the 2017-19 average of $0.9 trillion. Meanwhile, FX debt in emerging markets (Ems) now exceeds $5.3 trillion.

“Excluding China, FX debt makes up 20% of EM debt outside the financial sector”, IIF remarked. Thus, over $20 trillion of global bonds and loans come due through the end-2020; $4.3 trillion of that in EMs.

It said emerging markets will need to refinance $730 billion in FX debt through the end of 2020. An unprecedented surge in debt-to-GDP ratios ahead, IIF estimated as social distancing becomes the norm across most mature economies. On the back of developments in the global economy, IIF projected that global recession looms.

It explained that a recession would begin with $87 trillion more in global debt than at the onset of the 2008 financial crisis. READ: 12 Countries with FX Rates Unification Concerns

“With a sharp contraction in corporate earnings and mounting job losses already exacerbating the debt service burden for businesses and households;

“The aggressive fiscal response has already fueled a massive wave of government borrowing in many countries”, IIF stated. Gross government debt issuance hit an all-time monthly record of over $2.1 trillion in March ($3.2 trillion including other sectors).

IIF said using a simple top-down estimation, if net government borrowing doubles from 2019 levels, the world’s debt pile would surge from 322% of GDP to over 342% this year.

Hence while remarkable uncertainty around the scale and duration of the pandemic makes point estimates challenging, a sharp upward trajectory in debt levels looks all but certain.

“Much of course depends on the extent to which the virus is contained and treated. READ: SSA: Nigeria, Angola Under Less Pressure – Report

“Also, how well the fiscal policy response can support the most vulnerable segments of the economy.

“Particularly small and medium-sized enterprises (SMEs) and low-income households”, IIF remarked. The Institute explained that how firms, households react to these bold policy measures will make a big difference to recovery prospects. Moreover, beyond short-run disruptions, widening fiscal deficits and massive expansion in money stock could revive inflationary pressures.

“While this should ease debt burdens, the impact on prices will likely be quite different across countries, particularly between emerging and mature economies.”

The Institute believes that finding the right exit strategy could be even more challenging this time around.

“Highly accommodative monetary and fiscal policy is essential to mitigate liquidity and solvency risks.

“But prolonged ultra-loose policies could result in still greater debt imbalances and wealth/income inequality”, the Institute held. #Global debts expand 40% above 2008 financial crisis