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The already massive global debt pile expanded by another $10 trillion in the first six months of 2023, swelling to a staggering new record of $307 trillion, according to a report by the Institute of International Finance (IIF).
This latest debt surge, driven by rising interest rates and soaring inflation, has pushed the global debt-to-GDP ratio up to about 336% — its highest level in a decade. The debt ratio had declined for seven straight quarters before resuming its upward climb in early 2023.
“The stock of global debt rose $10 trillion in the first half of 2023, bringing it to a new record high of $307 trillion, according to a report by the Institute of International Finance released Tuesday,” reported CNBC.
Spiraling government deficits along with ballooning corporate and household borrowing have combined to add $100 trillion to the worldwide debt load compared to just 10 years ago. This unsustainable trajectory threatens to destabilize the global economy if unchecked.
“The high interest rate environment seen across most economies has sent the figure soaring, making the current debt pile $100 trillion more than it was a decade ago,” noted the CNBC article. “The global debt-to-GDP ratio now sits at around 336%, which is up from 334% in the fourth quarter of 2022.”
Rampant inflation was the primary culprit behind the decline in the debt ratio during the first half of 2023, the IIF report explained. Tighter lending standards and rising borrowing costs also contributed to the surge in debt.
According to the IIF’s data, mature economies including the U.S., U.K., Japan and France accounted for over 80% of the massive debt accumulation so far this year. Among emerging markets, China, India and Brazil saw the sharpest increases in debt levels.
“Domestic government debt is at ‘alarming levels’ in many emerging market countries, the IIF said — a state that the global financial architecture ‘is not adequately prepared to manage,’” CNBC reported.
On the consumer side, household debt remains manageable in most advanced economies after declining to its lowest ratio to GDP in 20 years. This cushion should enable further interest rate hikes from central banks if high inflation persists, per the IIF analysis.
“The health of household balance sheets, particularly in the U.S., would provide a cushion … against further rate hikes,” the IIF report concluded, according to CNBC.
The IIF data comes as the Federal Reserve prepares to announce its latest rate decision on Wednesday. Markets overwhelmingly expect the Fed to hold rates steady this time after 11 straight hikes aimed at cooling inflation.
But with global debt spinning out of control, economists warn the Fed and other central banks are running out of runway. Their inflation-fighting efforts risk triggering a wave of debt defaults and financial instability if pushed too far, too fast.
Global debt risks sparking another financial meltdown because the world’s major economies have become even more dependent on borrowing since the 2008 crisis.
With inflation raging, interest rates rising and economic growth faltering, there are risks of a debt crisis across sovereign, corporate and household sectors. This toxic combination could lead to waves of bankruptcies and defaults.”
However, reliable sources contends stimulus spending during the pandemic and current geopolitical tensions make deleveraging extremely difficult: “Debt levels may be alarming but cutting spending or raising taxes now would risk recession and trigger a deflationary spiral. For heavily indebted nations, the line between oustaining growth and avoiding catastrophe is razor thin.”
How policymakers navigate these economic crosscurrents will shape the global markets outlook heading into 2024 and beyond. Savvy investors will watch for any cracks appearing in the massive debt edifice as indicators of rising systemic risks.
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