Global Debt Trends

Global Debt Trends

News: Recently, according to the Institute of International Finance (IIF), Global Debt rose to an all-time high of USD 307 trillion in the second quarter 2023.

What is Global Debt?
• Global debt refers to the total amount of debt borrowed by governments, businesses, and individuals worldwide. It includes both public and private debtors.
• In the first half of 2023, advanced economies, including the US, U.K, Japan, and France, accounted for over 80% of the rise in global debt.
• Emerging market economies like China, India, and Brazil also witnessed substantial debt growth during this period.

What are the reasons behind rising global debt?
• Economic growth, population expansion, and increased government spending drive the need for borrowing.
• During economic downturns, governments intensify borrowing to stimulate economic activity and provide financial support.
• During the first half of 2023, total global debt rose by USD10 trillion. This has happened amid rising interest rates, which was expected to adversely affect demand for loans.

What are the concerns of growing Global Debt?
• High levels of global debt can impact economic stability. If countries default on their debts, it can cause panic on financial markets and economic slowdowns.
• Reduced Spending: To meet debt payments, at least 100 countries will have to reduce spending on health, education, and social protection.
• High levels of debt can strain a nation's fiscal health, diverting significant portions of revenue towards interest payments. This reduces the funds available for essential public services, infrastructure, and social welfare programs.
• A high concentration of debt in the financial system can pose systemic risks, particularly if the debt is held by a few major institutions. If a significant borrower defaults, it could trigger a chain reaction affecting the stability of the entire financial system.
• As debt levels rise, governments may face higher interest rates on new borrowings, which can exacerbate debt burdens.
• Limited Access to Financing: Debt has been translating into a substantial burden for developing countries due to limited access to financing, rising borrowing costs, currency devaluations, and sluggish growth.

What needs to be done to tackle Debt growth?
• Fiscal Consolidation: Undertake fiscal consolidation when conditions are favorable, along with policies that include structural reforms aimed at promoting growth.
• Creating Fiscal Space: Policymakers need to create fiscal space for priority public spending and build resilience for crises.
• Debt Resolution and Restructuring: Conducting a fair, objective, and in-depth analysis of global debt issues is crucial. This analysis should guide debt restructuring decisions, including potential debt haircuts or accepting losses on loans to ensure sustainability and fairness.
• Focus on developing and low-income countries facing acute economic stress and limited policy space. Provide targeted financial support, debt relief, or restructuring mechanisms tailored to their specific needs and circumstances.

Conclusion
• A balanced approach to managing global debt is imperative to ensure economic stability and sustainable growth.