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Debt in the global economy hit a new high in the first half of this year, while borrowing as a share of gross domestic product is rising again after nearly two years of decline, according to the Institute of International Finance.
Total debt – covering governments, businesses and households – rose by $10 trillion to around $307 trillion in the six months to June, the IIF said in its debt monitoring report. global debt published Tuesday. The previous peak in global debt occurred in early 2022, before central banks began aggressively raising interest rates.
Global debt as a percentage of GDP, which had been falling due to high inflation, reached 336 percent in June this year, an increase of 2 percentage points since the start of the year. But it remains below the peak of around 360 percent reached during the coronavirus pandemic.
The increase in debt comes as rising interest rates in most countries drive up borrowing costs – a key determinant of sovereign credit ratings. It also comes as climate transition financing puts pressure on governments to increase spending.
“Our concern is that countries will have to spend more and more money on interest expenses,” said Emre Tiftik, the lead author of the IIF report. “This will have long-term implications on countries’ financing costs and debt dynamics. »
The IIF said more than 80 percent of the additional debt in the first half came from mature markets, with the United States, Japan, the United Kingdom and France seeing the largest increases.
“Rising interest bills pose a major risk to public finances and sovereign ratings, particularly in developed markets,” said Edward Parker, chief executive of Fitch Ratings, the ratings agency that downgraded the rating. from the United States earlier this year.
The interest bill in developed markets remained stable in nominal terms between 2007 and 2021, despite rising debt levels. “But that free lunch is over and interest payments are now growing faster than debt or income,” Parker said.
Debt interest costs are expected to continue to rise as more debt is refinanced and interest rates remain higher to combat inflation, the report said. On Tuesday, the OECD warned that central banks would need to keep interest rates high or raise them further to beat inflation despite growing signs of economic strain.
The IIF said it was particularly concerned about rising interest charges on local currency emerging market debt, which now account for more than 80 percent of total emerging market interest charges.
He warns that as more countries are forced to restructure their debt, the high level of domestic debt leaves them vulnerable, as the IMF’s debt restructuring program is more focused on external creditors such as investment funds and other sovereign states, as well as foreign currency debt.
“The traditional tools at our disposal are largely designed to address vulnerabilities linked to external debt, leaving emerging markets in the middle of a vicious cycle of debt and inflation at the cost of a sharp decline in potential growth “, said Tiftik.
The report follows an IMF warning last week that governments “should take urgent action to help reduce debt-related vulnerabilities and reverse long-term debt trends.”
“Reducing the debt burden will create fiscal space and enable new investments, thereby helping to boost economic growth in the years to come,” the IMF said.