GLOBAL
DEBT – ECONOMY
News:
What are the reasons for
rise in global debt? | Explained
What's
in the news?
●
According to the Institute of
International Finance (IIF), global debt
rose to an all-time high of $307 trillion in the 2nd quarter (April-June
2023), rising by about $100 trillion over the last decade.
What
is Global Debt?
●
Global debt refers to the borrowings of governments as well as
private businesses and individuals.
●
Governments borrow to meet various
expenditures that they are unable to meet through tax and other revenues.
○
Governments may also borrow to pay
interest on the money that they have already borrowed to fund past
expenditures.
●
The private sector borrows predominantly
to make investments.
Measuring
Global Debt:
●
Measuring of global debt in
○
global debt in nominal terms
○
global debt as a share of GDP
●
Both global debt in nominal terms and
global debt as a share of GDP have been rising steadily over the decades.
●
The rise came to a halt during the pandemic
as economic activity turned sluggish and lending slowed down.
●
But global debt levels have started to
rise again in the last few quarters. During the first half of 2023, total
global debt rose by $10 trillion.
More
debt belongs to Developed Countries:
●
Most (over 80%) of the rise in global debt
in the first half of the year has come from advanced economies such as the US, UK, Japan, and France.
●
Among emerging
market economies, China, India and Brazil have seen the most growth in
debt.
Why
is Global Debt Rising?
- Rising interest
rate: This has happened amid rising
interest rates, which was expected to adversely affect demand for loans.
- The
IIF attributes this to the rise in price inflation, which it claims has
helped governments to inflate away the debts denominated in their local
currencies.
- Inflating away of
debt refers to the phenomenon wherein the central
bank of a country either directly or indirectly uses freshly created
currency to effectively pay off outstanding government debt.
- However,
the creation of fresh money causes prices to rise, thus imposing an indirect
tax on the wider economy to pay the government’s debt.
- High money supply:
A further rise in debt levels over
time is to be expected since the
total money supply usually steadily rises each year in countries
across the globe.
Consequences
of rising Global debt:
- Unsustainability of
debt: Rising global debt levels usually leads
to concerns about the sustainability of such debt. The IIF has warned that
the international financial infrastructure is not equipped to handle
unsustainable domestic debt levels.
- Bankruptcy and
balance of payment crisis: This is particularly
so in the case of government debt which is prone to rise rapidly due to
reckless borrowing by politicians to fund populist programmes.
- High debt servicing
burden: When central banks raise interest
rates, servicing outstanding debt becomes a challenge for governments with
a heavy debt burden.
- Inflationary
pressures: Government’s inflating away debt
measures led to inflation and it subsequently pressure central banks to
rise interest rate which is detrimental to economic growth of the country,
- Possibilities of
sub-prime crisis: Rapidly rising private debt levels
also lead to worries among analysts about their sustainability. This is
because such a rise is linked to unsustainable booms that end in economic
crises when such lending is not backed by genuine savings. The most recent
example of the same was the 2008 global financial crisis, which was
immediately preceded by an economic boom fuelled by the US Federal
Reserve’s easy credit policy.
The surge in global debt warrants attention, given its
potential implications for economic stability, sustainability, and the capacity
of financial systems to address mounting debt challenges.