Over the past 50 years, four tidal waves of debt have crashed down on the global economy – three of which ended in crisis.
Latin America endured a lost decade in the 1980s, Asia was gripped by a sharp downturn in the 1990s and the 2008 global financial meltdown sent shockwaves around the world.
The fate of the fourth, which began in 2010, is yet to be determined. However, the evidence suggests history is already repeating itself.
Public debt soared during the pandemic as governments ripped up borrowing rules to keep households afloat with financial support.
The issue of indebtedness subsequently eased as the global economy recovered, although it has now reestablished itself once again.
The International Monetary Fund (IMF) believes global public debt is on course to rise from around 20pc of gross domestic product (GDP) in 2005 to almost equal the size of the global economy by the end of the decade.
Total debt, including borrowing racked up by governments, households and businesses, now stands at $307 trillion (£250 trillion), up $10 trillion in the first six months of 2023, according to the Institute of International Finance (IIF).
A post-pandemic decline in debt ratios as lockdowns ended has come to an end, with four-fifths of the recent increase driven by advanced economies such as the US and UK.
At the same time, global growth is slowing, which means countries can’t rely on expanding the economic pie to keep debts on a sustainable path.
The IMF’s latest global outlook warned that many countries are now on course to grow at half the rate they used to, leaving the world on track for permanently lower growth that exposes it to economic shocks and “diminished opportunities to overcome the scarring from the pandemic and the war”.
Emre Tiftik, a director at the IIF, believes countries have become addicted to debt.
“Right now most countries have a growth model that is completely based on borrowing,” he says.
“And whenever that borrowing slows down, we see less growth. Over the medium to long term that has big, negative consequences, so we are worried. Especially if the pace of that debt accumulation is extremely rapid.”
Debt can’t always be subdued
Higher interest rates have also sent the cost of servicing debt soaring as some continue to borrow huge amounts to plug the gap between tax revenues and public spending.
This has alarmed both bankers and economists.
Jamie Dimon, the chief executive of JP Morgan, warned last week that borrowing around the world was too high.
He said: “I look at the financial situation and the fiscal spending – it’s more than it’s ever been in peacetime by a long shot, with the highest government debt levels we have ever had. And there’s this omnipotent feeling that central banks and governments can manage all of this stuff [but] I’m cautious.”
Mohamed El-Erian, chief economic adviser at Allianz, says the debt reckoning will not hit countries equally. “While debt burdens are rising in most countries around the world, the implications vary quite a bit,” he says.
“Some countries are particularly well placed to handle the heavier debt loads, especially as they have solid medium-term growth potential and benefit from structural advantages such as deep financial markets and global acceptance for their currency.
“Others are already at or very near breaking point, lacking external or domestic resources to meet their heavy and increasing debt servicing.”
Those at breaking point include many developing economies which are shut out of international debt markets.
Tiftik says that of the 73 countries identified by the World Bank as being among the poorest and most vulnerable during the pandemic, just two were able to borrow externally this year.
“Only Mongolia and very recently Uzbekistan this month were able to raise capital from international debt markets,” he says. “The rest don’t have access.”
“Many are being crushed under the weight of their debts,” says Tiftik: “In some African countries, more than 50pc of government revenues are going to interest expenses.”
Others have already defaulted. Last year saw the highest number of sovereign defaults since 1983 – a number that could easily be surpassed in 2023.
Rising interest rates have led to missed payments on debt worth a record $550bn alone this year, up from $330bn in 2019, according to the IIF.
While this represents less than 1pc of outstanding debt, the trend is clear as more countries drown in debt.
A silent crisis
Ayhan Kose, the World Bank’s deputy chief economist, says that even if countries do not default, many are already in the middle of a “silent debt crisis”, where borrowing over a number of years has left countries permanently teetering on the brink of bankruptcy.
Dollar-denominated debt also remains an issue for countries as the combination of rising interest rates and fears about the global economy push up the value of the dollar compared with emerging market currencies.
There is currently $12.9 trillion of dollar-denominated debt outside the US, according to data published by the Bank for International Settlements (BIS). Roughly half of that needs to be refinanced within the next year.
But even stronger economies are feeling the pinch. Borrowing in advanced economies remains above pre-Covid levels. The US Congressional Budget Office believes America’s deficit will hit 10pc of GDP by 2053, up from the current 6pc, as the population continues to age.
Tiftik at the IIF and Kose at the World Bank agree that countries like the UK and the US, which borrow in their own currencies, do not face the same funding challenges as emerging markets.
But borrowing binges have a price. And for advanced economies, that price is weaker growth and less money to fund public services as more taxpayer cash is devoted to servicing debt.
The UK’s example is stark. Back in November 2020, debt interest spending was forecast by the OBR to be just £25.5bn in 2023-24. This March, the OBR predicted it would hit £94bn.
This means debt service costs could be roughly equivalent to 4.5pc GDP in 2022-23, more than double the 2pc spent the year prior and the highest since the aftermath of World War II.
The UK’s debt interest bill this year is expected to exceed the entire education budget.
Tiftik says that for the US, which was recently singled out by the IMF for its “worrying” levels of borrowing, the issue is not whether they will “deliver on [borrowing] commitments”.
Stunted growth
Rather, he says: “The real issue is how much do we really want to dedicate government revenues to interest payments? How beneficial is that for supporting growth? It’s the interest burden of these large debt [piles] that is the main question that needs to be addressed.”
He adds that policymakers must focus on growth if they are to avoid being crushed by debt.
“It’s critical for policymakers to create an enabling environment for growth,” says Tiftik. “This is critical [because] growth is driven by the private sector. So the private sector wants clarity and doesn’t like uncertainty. It’s the biggest factor when making an investment decision, so an enabling environment is key.”
Kose at the World Bank says time is already running out.
“We started with one of the deepest global recessions in 2020. We had a rebound. After that growth came down. Every year growth was weaker than the previous year at the global level. And in the 2010s, growth was around 3pc.
“Now it’s 2.5pc. [The] UK and Europe are facing huge demographic challenges, huge challenges in terms of productivity, huge challenges in terms of having sustained investment growth.”
The risk now, he says, is that the world slips into a lost decade caused by a “time bomb” of debt.
“I think it’s fair to say we’ve already lost the first half of the 2020s,” says Kose. “The big question now is whether we will lose the second.”
Source: finance.yahoo.com