The Institute of International Finance (IIF) says global debt will soar to a record $277 trillion by the end of 2020 as governments and companies continue to spend in response to the COVID-19 pandemic. Already, the debt has ballooned by $15 trillion this year to $272 trillion through September. Governments from developed markets account for more than half of that increase, according to the IIFâ€™s Global Debt Monitor.
Governments from Developed Markets Are the Biggest Borrowers
According to a report, debt repayments will prove to be â€œmuch more onerousâ€ despite the â€œrecord-low borrowing costs across the globe.â€ Declining revenues to emerging market governments will be partly to blame. IIF data shows that emerging market debt-to-GDP hit nearly 250% in the third quarter.
For China, the debt-to-GDP ratio reached 335% in the just-ended quarter, while the entire 2020 ratio is expected to peak at around 365% of global GDP.
On the other hand, developed marketsâ€™ overall debt jumped to 432% of GDP in the third quarter, from a ratio of about 380% at the end of 2019. Indications are that this will go up further in Q4.
Risks of Deleveraging
Meanwhile, the IIF data shows that the US, which has borrowed heavily in the year, will see its debt hitting $80 trillion in 2020 up from $71 trillion in 2019. Similarly, in the Euro area, the â€œdebt rose by $1.5 trillion to $53 trillion through September.â€
While the current debt-to-GDP ratios are worrisome, the IIF report speculates on the potential ramifications if countries suddenly decide to deleverage. The report says:
â€œThere is significant uncertainty about how the global economy can deleverage in the future without significant adverse implications for economic activity.â€
Still, the disproportionately high debt levels will have a negative impact on the global economy in the long term. Pressed countries might be forced to create money to pay off debts while others will default on their obligations.
Recently, Zambia became the sixth developing country to default after the Covid-19 induced revenue drop affected the Southern African nationâ€™s ability to meets its obligation.
What are your thoughts on the growing global debt? Tell us what you think in the comments section below.
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