Global Debt Inches Close to $305tn, about $45tn over Pre-COVID Level

Grew by $8.3tn in Q1 2023

The global debt stock grew by $8.3 trillion to a near-record $305 trillion in the first quarter of 2023, occasioned by a combination of high debt levels and rising interest rates, the International Institute of Finance (IIF) has said.

The high debt levels and rising interest rates pushed up debt service costs, prompting concerns about the use of leverage in the financial system, the global financial services trade group said in its latest quarterly Global Debt Monitor report.

According to the report by the Washington DC-based IFF, the global debt pile grew by $8.3 trillion in the first quarter to a near-record high of $305 trillion as the world economy faced a "crisis of adaptation" to rapid monetary policy tightening by central banks.

Apex banks around the world have been hiking interest rates for over a year in a bid to rein in sky-high inflation.

The US Federal Reserve earlier this month lifted its fed funds rate to a target range of 5 per cent-5.25 per cent, the highest since August 2007.

"With financial conditions at their most restrictive levels since the 2008-09 financial crisis, a credit crunch would prompt higher default rates and result in more 'zombie firms' — already approaching an estimated 14 per cent of US-listed firms," the IIF said.

Zombie firms are companies with earnings that are sufficient to allow them to continue operating and pay the interest on their debt, but not to pay off the debt, meaning any cash generated is immediately spent on debt. Such companies are therefore "neither dead nor alive."

The report observed that the sharp increase in the global debt burden in the three months to the end of March marked a second consecutive quarterly increase following two quarters of steep declines during last year's run of aggressive monetary policy tightening.

It stressed that non-financial corporates and the government sector drove much of the rebound.

The IIF report underscored the fact that at close to $305 trillion, global debt is now $45 trillion higher than its pre-pandemic level and is expected to continue increasing rapidly

It stressed that despite concerns about a potential credit crunch following the recent turmoil in the banking sectors of the United States of America and Switzerland, government borrowing needs remain elevated.

The Washington DC-based organisation said aging populations, rising health care costs and substantial climate finance gaps are exerting pressure on government balance sheets.

It projected that national defence spending is expected to increase over the medium term due to heightened geo-political tensions, which would potentially affect the credit profile of both governments and corporate borrowers.

"If this trend continues, it will have significant implications for international debt markets, particularly if interest rates remain higher for longer," the report noted.

Total debt in emerging markets hit a new record high of more than $100 trillion, around 250 per cent of gross domestic product (GDP), up from $75 trillion in 2019. China, Mexico, Brazil, India and Turkey were the largest upward contributors.

In developed markets, Japan, the US, France and the U.K. posted the sharpest increases over the quarter.