In a concerning financial development, global debt has soared to an astonishing $307 trillion in the second quarter of 2023. This represents an alarming $10 trillion increase within the first half of the year, as reported by the Institute of International Finance (IIF). Even as interest rates have been rising, putting a damper on bank credit, this unprecedented surge in global debt has raised eyebrows across the financial world.
The IIF, a financial consortium representing some of the world’s largest banks and financial powerhouses, also highlighted that global debt has skyrocketed by an astounding $100 trillion over the past decade. This sharp escalation in debt levels has raised concerns about the sustainability of the global financial system.
Interestingly, debt has continued to climb as a proportion of global gross domestic product (GDP), moving from 336% at the end of 2022 to an anticipated 337% by the close of this year. This increase follows a prior rise of 334%. The factors contributing to this uptick in the debt-to-GDP ratio include expansive budget deficits, sluggish economic growth, and decelerating inflation. This shift comes after nearly two years of rampant inflation, during which many sovereigns and corporations used inflation to erode their local currency debts.
Emre Tiftik, Director at IIF, noted that the sudden surge in inflation was a key factor behind the significant decline in the debt ratio over the past two years, allowing entities to reduce their debt burdens through inflationary means.
One noteworthy positive aspect of the report is that, in the first half of 2023, advanced economies experienced their lowest levels of household debt as a percentage of GDP in two decades. The IIF emphasized that if inflationary pressures persist in these markets, the “health of household balance sheets, particularly in the U.S., would provide a cushion against further rate hikes.”
However, it is crucial to underscore that these advanced economies account for over 80% of the overall increase in global debt, with the United States recently surpassing the $33 trillion debt milestone. Notably, even major economies such as those in the BRICS group, including China, India, and Brazil, have witnessed significant debt increases.
Global debt’s persistent growth occurs simultaneously with central banks raising interest rates to curb inflation. For instance, the Federal Reserve has raised rates by more than 5% over the last 18 months. Despite these efforts, the report has sounded alarm bells, highlighting that government debt levels are “reaching alarming rates in many countries” and warning that the “global financial architecture is not adequately prepared to manage risks associated with strains in domestic debt markets.”
As the world grapples with the ever-increasing burden of debt and the challenges posed by rising interest rates, policymakers, and financial institutions face a daunting task in ensuring the stability of the global financial system in the years to come