The sudden rise in inflation has pushed global debt to new highs.
In the second quarter of 2023, global debt was recorded as $307 trillion, largely driven by developed countries like the US, Japan, the UK and France.
So what is global debt and why does it matter?
Global debt is borrowing by governments, businesses and people, and it’s at dangerously high levels.
In 2021, global debt reached a record $303 trillion, a further jump from what was record global debt in 2020 of $226 trillion, as reported by the International Monetary Fund (IMF) in its Global Debt Database. This was the biggest one-year debt surge since the Second World War, according to the IMF.
Now it has not only reached a new record, but pushed the global debt-to-GDP ratio – which had previously been in decline – to 336% for the second consecutive quarter.
“As higher rates and higher debt levels push government interest expenses higher, domestic debt strains are set to increase,” the Institute of International Finance (IIF) warns.
Why does global debt matter?
Emerging and developing economies have been the worst hit by previous debt crises, World Bank research shows.
To meet debt payments, at least 100 countries will have to reduce spending on health, education and social protection, the IMF estimates.
In 2022, the last year with data available, low- and middle-income countries paid an unprecedented $443.5 billion to service their external public and publicly guaranteed debt, according to the World Bank’s International Debt Report 2023.
“Record debt levels and high interest rates have set many countries on a path to crisis,” said Indermit Gill, the World Bank Group’s Chief Economist and Senior Vice President.
If countries default on their debts, it can cause panic on financial markets and economic slowdowns.
For businesses, meeting repayments on high levels of debt can mean less money is available to invest in jobs and expansion. Insolvency is also a risk for businesses that are unable to pay back their loans.
For households, high levels of debt can force them to cut some areas of spending, such as food or fuel. Low-income households are most at risk, the IMF says.
What do experts say about global debt?
When low-income countries get into debt distress, it’s associated with “protracted recessions, high inflation and fewer resources going to essential sectors like health, education and social safety nets, with a disproportionate impact on the poor,” the World Bank says.
Debt distress is when a country is unable to fulfil its financial obligations, such as repayments due on its debt. The IMF and World Bank believe 60% of low-income countries are at or near this point.
Rising prices mean inflation is spiking, so central banks are increasing interest rates to try and contain this. Rising interest rates, in turn, mean higher loan repayments.
More than 80% of the 2023 debt build-up has come from the developed world, reports Reuters, with the US, Japan, the UK and France registering the largest increases. Among emerging markets, the biggest rises came from China, India and Brazil.