Global debt falls from record low amid sharp rise in interest rates

Global debt fell by a record in the second quarter of this year as the more than decade-long era of cheap borrowing costs comes to an end amid a weakening economic outlook and rising interest rates.

Debt levels for the April-June quarter fell by about $5.5 trillion to $300 billion, after rising more than $2.5 billion in the first three months of 2022 , said the Institute of International Finance in its latest Global Debt Monitor report.

“This is the first quarterly decline since the third quarter of 2018,” the IIF said. “While this is largely a valuation effect – with other G10 currencies having fallen more than 12% against the US dollar this year – a rapid slowdown in debt issuance has also contributed. “

After steady declines in recent quarters, the global debt-to-gross domestic product ratio has however increased slightly and is expected to reach over 350% of global GDP by the end of this year.

The ratio rose for the first time in the past five quarters as emerging market debt levels rose at a faster rate to 252% of GDP.

“[This is] largely reflecting the hit of a sharp slowdown in emerging markets [emerging market] growth and suggesting that inflationary pressures have not been high enough [yet] to drive down debt ratios,” the Washington-based institute said.

“We expect this increase in debt ratios to continue at least until the end of 2022.”

Although higher rates have disrupted the borrowing plans of many businesses and consumers, governments may borrow more to address concerns about a rapid slowdown in growth, particularly in China and Europe.

Rising social tensions, driven by rising energy and food prices, are also expected to push governments and state-owned enterprises to borrow more to mitigate the impact of the economic downturn, the IIF said.

Central banks have poured out more than $25 billion to support the global economy during the Covid-19 pandemic, but are now battling runaway inflation.

Policymakers have tightened monetary policy by raising interest rates to curb inflation, which is at its highest level in four decades in the United States and the United Kingdom.

Rising consumer prices in Europe forced the European Central Bank to raise interest rates by a record 75 basis points earlier this month.

The IIF said aggregate debt in mature markets fell by $4.9 billion to around $201 billion in the three months to the end of June.

The United States and Canada were the only countries where debt levels increased over the period.

The decline in dollar-denominated debt in emerging markets was much smaller, at around $600 billion, bringing total borrowing in emerging markets to around $99 billion, according to IIF data.

The sharp rise in borrowing costs led to a substantial decline in issuance in syndicated loan markets, while long-term bond transactions by non-financial corporations fell to their lowest level since 2014.

Over the past decade, low interest rates have given many smaller, less successful businesses a lifeline with cheap debt financing.

The Institute of International Finance

“During the first eight months of 2022, the pace of government bond issuance was about 20% lower than the same period in 2021. Adjusted for inflation, the volume of global bond issuance is now at a multi-year low,” the IIR said.

Rising inflation and a stronger US dollar are also undermining the creditworthiness of many sovereign borrowers in emerging markets, as “market access disparities have become more pronounced”.

“Elevated debt vulnerabilities have already forced a handful of high-yield issuers to approach the IMF [International Monetary Fund] support, including Sri Lanka and Ghana,” the IIR said.

Globally, corporate issuers are also struggling to approach markets and are already struggling to service debt as the era of cheap borrowing draws to a close.

“Over the past decade, low interest rates have given many smaller, less successful businesses a lifeline with cheap debt financing,” the IIF said.

“Looking forward, a significant increase in bankruptcies may well be on the cards as borrowing costs rise, which will make it quite difficult for central banks to stage a soft landing without negative implications for labor markets. “

Updated: September 17, 2022, 5:30 a.m.

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