Global debt has reached a remarkable $307 trillion during the second quarter, marking a significant $47 trillion increase from its pre-pandemic levels. This surge in debt is primarily attributed to the ongoing adjustment to rapid monetary policy tightening by central banks, a phenomenon outlined in a report by the Institute of International Finance (IIF).

Despite rising interest rates leading to a decline in bank credit, it’s worth noting that the surge in global debt has been led by countries such as the United States and Japan, according to the IIF’s research findings. In the first half of 2023 alone, global debt increased by $10 trillion, and over the past decade, it has skyrocketed by $100 trillion.

The IIF has previously referred to this trend as a “crisis of adaptation” to a “new monetary regime.”

Notably, the global debt-to-GDP ratio, which had been on a declining trajectory for seven consecutive quarters until 2023, has now risen to 336 percent for two consecutive quarters. This upward trend in the debt ratio can be attributed to a combination of slower economic growth and a deceleration in price increases.

Inflation plays a significant role in this equation, being the primary factor responsible for the sharp decline in the debt ratio over the past two years. The IIF anticipates that the debt-to-output ratio will likely exceed 337 percent by year-end, even with some easing of inflationary pressures—although it may not meet targeted levels.

Developed nations have been at the forefront of this surge in global debt, with countries like the United States, Japan, Britain, and France contributing to over 80 percent of the recent debt accumulation. On the other hand, emerging markets have also experienced substantial increases, with the three largest economies, China, India, and Brazil, leading the way.

Within this context, it’s worth noting that household debt-to-GDP in emerging markets still exceeds pre-Covid-19 levels, largely influenced by countries like China, Korea, and Thailand. Conversely, mature markets have seen a contrasting trend, with the same ratio reaching its lowest point in two decades during the first half of this year.

Economists have highlighted that the rapid tightening of monetary policies has revealed vulnerabilities in the liquidity positions of various small and mid-sized banks in the United States. This has led to a series of bank collapses and bailouts in recent months, although these instances appear more isolated than systemic. However, concerns about potential contagion have led to significant deposit withdrawals from regional U.S. banks, resulting in market panic that eventually spread to Europe and forced the emergency sale of Swiss banking giant Credit Suisse to UBS.

The continued escalation of global debt emphasizes the ongoing challenges faced by economies and financial institutions worldwide. Balancing these mounting debt burdens while mitigating potential risks will remain a critical concern moving forward.

Photo Source: Google

By: Montel Kamau
Serrari Financial Analyst
21st September, 2023