In the last 50 years, three of the four debt tidal wave that hit the world economy ended in crisis.
Latin America suffered a lost decade during the 1980s. Asia experienced a severe downturn during the 1990s. The 2008 global financial crisis sent shockwaves throughout the world.
It is still unknown what will become of the fourth group, which began 2010 and continues to this day. The evidence does suggest that history is repeating itself.
Public debt increased during the pandemic, as governments relaxed borrowing rules in order to provide financial assistance to households.
The problem of debt has now reestablished itself .
The International Monetary Fund believes that global public debt will rise to around equal the size the global economy at the end of this decade. It is expected to increase from 20pc in 2005.
According to the Institute of International Finance, the total debt, which includes borrowing by governments, businesses and households, is now $307 trillion. This represents an increase of $10 trillion over the first half of 2023.
The post-pandemic drop in debt ratios has ended as the lockdowns have been lifted. Four-fifths (45%) of the recent rise is attributed to advanced economies like the US and UK.
Moreover, the global economy is slowing down, so countries cannot rely on increasing the economic pie in order to maintain debt on a sustainable course.
The IMF’s latest global outlook warned, that many countries were now on track to grow at half as fast as they used to. This would leave the world permanently on a lower growth path that exposed it to economic shocks.
Emre Tiftik is a director of the IIF and believes that nations have become addicted to debt.
He says that “right now, most countries are relying on borrowing to drive their growth.”
“And when that borrowing slows down we see less growth.” We are concerned because this has negative effects on the medium- to long-term. “Especially if that debt is accumulating at an extremely rapid pace.”
The cost of servicing debt has also risen as many continue to borrow large amounts to fill the gap between public spending and tax revenue.
Both bankers and economics have been alarmed by this.
Jamie Dimon warned that the global borrowing rate was too high last week.
He said: “I’m looking at the financial situation, and the fiscal expenditure – it is more than ever in peacetime. We have the highest levels of government debt we’ve ever had.” There’s a feeling of omnipotence that governments and central banks can handle all this stuff, but I am cautious.
Mohamed El-Erian is the chief economist at Allianz. He says that not all countries will be affected equally by debt. He says that while debt burdens are increasing in many countries, the consequences vary.
Some countries are better able to manage their debt than others, especially if they have a solid growth potential in the medium term and structural advantages like deep financial markets or global acceptance of their currency.
Others are at or near the breaking point due to a lack of external or domestic resources.
Many developing countries are at the breaking point because they have been shut out from international debt markets.
Tiftik reports that only two of the 73 nations identified by the World Bank to be among the poorest, most vulnerable countries during the pandemic were able borrow from abroad this year.
He says that only Mongolia, and Uzbekistan very recently this month, were able raise capital on international debt markets. “The rest do not have access.”
Tiftik says that in some African countries more than 50% of the government’s revenue is spent on interest.
Other countries have defaulted. The number of sovereign defaults in 2013 was the highest since 1983. This number could be easily surpassed by 2023.
According to the IIF, rising interest rates led to missed debt payments worth $550bn this year alone. This is up from $330bn last year.
This represents less than 1% of the outstanding debt but it is evident that more and more countries are drowning in debt.
Ayhan KOSE, deputy chief economist at the World Bank, said that many countries are already experiencing a “silent crisis”, in which borrowing for a long time has led to countries being permanently on the verge of bankruptcy.
The dollar-denominated loan is also a problem for many countries, as rising interest rates and concerns about the global economic situation have pushed the value of the US Dollar up against emerging market currencies.
According to the Bank for International Settlements’ (BIS) data, there is $12.9 trillion in dollar-denominated foreign debt. About half of this debt needs to be refinanced in the next 12 months.
Even the strongest economies are not immune to the squeeze. The borrowing in advanced economies is still above pre-Covid rates. The US Congressional Budget Office estimates that America’s deficit is expected to reach 10pc by 2053. This will be up from 6pc at present, due to the aging population.
Tiftik, IIF, and Kose, World Bank, both agree that emerging markets do not face funding challenges similar to those faced by countries such as the UK or the US which borrow their own currency.
But borrowing sprees have a cost. For advanced economies, this price is lower growth and less money for public services because more taxpayer cash goes to servicing debt.
The UK is a good example. In November 2020, the OBR predicted that debt interest expenditure would be only £25.5bn by 2023-24. The OBR forecasted that it would reach £94bn in March.
The debt service costs in 2022/23 could be equivalent to roughly 4.5pc of GDP, which is more than twice the 2pc that was spent the previous year and the highest level since the end of World War II.
This year, the UK’s interest on debt is expected to surpass the education budget.
Tiftik says the question is not whether the US will “deliver” on its borrowing commitments, despite the fact that the IMF recently criticized the US for their “worrying levels”.
He says, “The real question is: How much of the government’s revenue do we want to devote to interest payments?” What is the benefit of this for growth? The main issue is the interest burden on these huge debt [piles].
He says that policymakers should focus on growth to avoid debt crushing.
Tiftik says that it’s crucial for policymakers create a growth-enabling environment. This is important [because] the private sector is driving growth. The private sector is looking for clarity, and does not like uncertainty. “An enabling environment will be the most important factor in making investment decisions.
Kose, a World Bank official, says that time is running out.
“We began 2020 with one of deepest recessions worldwide. After the recession, we had a recovery. The growth slowed down after that. Globally, growth has been weaker every year. In the 2010s growth was about 3pc.
“Now it’s 2.5pc. “[The] UK and Europe face huge demographic challenges. They also face huge challenges with productivity. And they are facing enormous challenges when it comes to having sustained investment growth.”
He says that the risk is now that we will slip into a lost century caused by “a time bomb” of debt.
Kose says, “It’s fair to assume we’ve lost the first half the 2020s.” The big question is now whether we’ll lose the second half.