Pandemic fuels global “debt tsunami”

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Global debt rose at an unprecedented rate in the first nine months of the year as governments and corporations sparked a “debt tsunami,” according to new research, amid the coronavirus crisis.

The pace of debt accumulation will push the global economy to reduce borrowing in the future without “a significant negative impact on economic activity,” warned the Institute of International Finance on Wednesday.

Total global debt has increased by $ 15 trillion this year and is expected to exceed $ 277 trillion in 2020, said the IIF, which represents financial institutions. It expects total debt to reach 365 percent of global gross domestic product by the end of the year, up from 320 percent at the end of 2019.

Debt burdens are particularly stressful in emerging markets, which have soared 26 percentage points to nearly 250 percent of GDP so far this year, the IIF said. According to IIF data, the share of government revenue in emerging markets that is spent on repayments has also risen sharply this year.

This week, Zambia became the sixth developing country to default or reschedule its debt in 2020. Further presets are expected as the cost of the pandemic increases.

The G20 group of the world’s largest economies has launched an initiative that has so far enabled 46 of the world’s poorest countries to postpone $ 5 billion in debt repayments due this year. You are too in the direction Provision of additional IMF funds for poorer countries.

However, analysts said more action was needed to stave off the rising risk of a financial crisis in a variety of developing countries.

Luis Oganes, director of emerging markets research at JPMorgan, said emerging markets are at risk of rising inflation if they tried to monetize their debt by buying their own bonds, as some have done this year, or deflation if they did allow too high a rise in debt.

“Big debt will lead to zombie banks and zombie companies that stifle growth,” he said.

Since the pandemic began, leading central banks have cut interest rates and pumped monetary stimulus into the global economy, which has helped lower borrowing costs around the world. Even so, collapsing tax revenues have made emerging market debt much more difficult to service.

By the end of next year, according to IIF estimates, around $ 7 trillion of debt from borrowers in emerging markets will have to be repaid, about 15 percent of that in US dollars, exposing borrowers to risk of currency fluctuations.

Emre Tiftik, IIF director of sustainability research, said debt rose much faster than expected at the start of the crisis.

From 2016 to the end of September, global debt rose by $ 52 trillion; This compares with an increase of 6 trillion US dollars between 2012 and 2016. The pace of global GDP growth barely changed over this period until the outbreak of the pandemic sparked a historic recession.

Line graph of the share of government revenue spent on public debt servicing (%), showing that debt servicing costs have increased in emerging markets

The change in debt – without a corresponding change in output growth – “indicates that we are seeing a significant decrease in the GDP-generating capacity of debt,” Tiftik said. “Aggressive support measures will be with us for some time and will inevitably increase the debt significantly.”

The surge in emerging market debt was driven by a surge in corporate non-financial debt in China, bringing total emerging market debt to $ 76 trillion. Excluding China, the value of the US dollar debt of other emerging markets declined this year, reflecting the depreciation of local currencies against the dollar.

Mr Tiftik said financial institutions tried to “Build buffers against the Covid shock “. “A significant portion of their new debt went to customers, which was very useful in absorbing the initial shock of the crisis,” he said.

The indebtedness of the industrialized countries rose by more than 50 percentage points this year and reached 432 percent of GDP at the end of September. Almost half of this was in the United States; its debt is set to hit $ 80 trillion this year, down from $ 71 trillion at the end of 2019.

Modified this article to correct a graph showing global debt as a percentage of GDP

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