Sovereign debt rises by $10 trillion in 2020

Global government debt is estimated to have increased by about $10 trillion in 2020 to $77.8 trillion, equivalent to 94 per cent of the world GDP, according to rating agency Fitch.

Nearly all governments have coped with the economic fallout of the pandemic similarly—by boosting spending on health sectors and providing support to households and businesses, while running up debt to pay for it.

Both the increase and level of debt will be records, Fitch said. The previous $10 trillion tranche took seven years to build, from 2012 to 2019.

“The rapid and widespread increase in debt has had a significant effect on sovereign credit ratings, with a record 51 downgrades of 33 sovereigns in 2020, 27 of which are emerging markets. The sovereigns downgraded multiple times were all emerging markets,” James McCormack, global head of sovereigns,

Fitch Ratings said.

There are three primary consequences of the high and rising emerging-market debt burden, all of which are already in play, according to Fitch.

First, there will be additional episodes of credit stress and default.

There were five defaults in 2020—Argentina, Ecuador, Lebanon, Suriname and Zambia—a record yearly high.

“We expect there to be more defaults in 2021, along with greater attention on debt-remedy initiatives,” Fitch said.

“Second, some emerging markets that are not at risk of default and have well-developed local-currency debt markets will continue to explore unconventional monetary policies.”

“In emerging markets, government debt increased seven-fold to $19 trillion, and interest payments jumped to an estimated $680 billion in 2020 from $220 billion in 2000. While the increase in interest payments did not fully keep pace with the increase in debt, there has been an uninterrupted rise,” McCormack said.

Comparing 2010 with

2020, the median effective interest rate for developed-market sovereigns fell from just over 4 per cent to just under 2 per cent. For emerging markets, the rate went in the other direction, increasing from 4.3 per cent to 5.1 per cent.

The third consequence will be, if developed-market rates sink even lower, there may be a greater incentive for emerging-market sovereigns to turn to foreign-currency funding.

On current trends, Fitch forecasts interest payments by governments in developed and emerging markets will converge by 2022 at about

$860 billion.