Alarming global debt levels lead to crisis fears

Global debt constitutes borrowing by governments, businesses and people, and it’s at dangerously high levels.Global debt climbed by $10tn in the first half of 2023, resuming its upward march as a share of the world economy after falling for close to two years as inflation surged, according to the Institute of International Finance (IIF).Liabilities clocked in at record $307tn, up a "staggering” $100tn over the past decade, according to the group representing the world’s largest international banks and financial institutions.The US, Japan, the UK and France have led the latest advance.As a share of world gross domestic product, global debt climbed to 336% from 334% at the end of last year and is projected by the IIF to hit 337% by the end of 2023, largely driven by sizeable government budget deficits.Over 80% of the $10tn rise in global debt in the first half came from developed economies, says the IIF.The IIF has voiced concern over the high levels of government debt, especially in emerging and frontier markets, zeroing in on liabilities in local currencies.The fallout from a mix of external shocks and mounting financial troubles are washing over low- and middle-income countries, creating perhaps the biggest confluence of challenges since the 1990s, when a series of rolling crises sank economies and toppled governments.Before the Covid-19, the world’s poorer countries had a debt problem. The pandemic made it worse.By the end of 2021, more than 70 low-income nations faced a collective debt burden of $326bn. Their debt service burden had more than doubled since 2010 as a percentage of gross national income, according to the World Bank.In 2022, their annual debt payments totalled about $62bn, about 35% more than the year before. By early 2023, more than half of those were already in or near debt distress.The global economy surpassed $100tn for the first time in 2022; but government debt levels as a share of GDP increased in over 100 developing countries between 2019 and 2021, says UNCTAD.While recession concerns have eased in some quarters, six out of 10 chief economists expect the global economy to weaken this year, according to the World Economic Forum’s Chief Economists Outlook.Emerging and developing economies have been the worst hit by previous debt crises, World Bank research shows.To meet debt payments, at least 100 countries will have to reduce spending on health, education and social protection, the International Monetary Fund estimates.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 in jobs and expansion. For households, high levels of debt can force them to cut some areas of spending, such as food or fuel.Low-income households are most at risk, according to the IMF.Debt is near or higher than 100% of output in Britain, the US and Italy. Ageing populations, climate change and geopolitical risks such as conflicts in Ukraine and the Middle East mean significant spending pressures ahead.Interest payments surging with high rates add to the pressure.US net interest payments will rise from 2.5% to 3.6% of GDP by 2033 and 6.7% by 2053, the Congressional Budget Office estimates.Britain’s Office for Budget Responsibility expects interest costs to rise to 7.8% of revenues by 2027-28, from 3.1% in 2020-21, exacerbated by inflation-linked debt.Even Germany’s interest spending is up 10-fold since 2021 to nearly €40bn.Efficient spending, reforms and growth plans are key to managing mounting debt levels, according to experts.