Regardless of the abrupt rise in interest rates, the debt pile continues to grow. The outstanding balance of public and private liabilities on a global scale added 10 trillion dollars (9.3 trillion euros, seven times the Spanish GDP) more in the first half of 2023, according to data published this Tuesday by the Institute of International Finance (IIF, for its acronym in English, a kind of global banking association). With this new increase, the total volume of debt pending repayment remains at 307 trillion dollars, a new record and 100 trillion more than a decade ago.
The rebound also means reversing the trend of the last seven quarters, in which the combined debt of governments, companies, financial firms and households had dropped slightly. The origin is, fundamentally, in the rich countries, in which – paradoxically – interest rates have increased the most: the United States, Japan, the United Kingdom and France led the increase in debt between January and June 2023. In the emerging block, the main catalysts of the increase were China, India and Brazil.
In relative terms, the accumulated debt now represents 336% of global GDP, two percentage points more than at the end of last year. Beyond the increase in the outstanding balance itself, there is an additional variable: the tempering of prices, after a period in which the rise in the CPI had laminated debt.
“The sudden increase in inflation was the main factor behind the sharp decline in the ratio (over GDP) in the last two years, allowing States and companies to reduce their liabilities in local currency,” explain the IIF technicians in their latest report. quarterly, eloquently titled In search of sustainability. The trend, however, has changed: “With wage and price pressures moderating, although not yet returning to the target levels (of the central banks), we expect the ratio to exceed 337% of GDP by the end of the year.”
Pop-up “alarm”
The public debt of emerging countries, excluding China, grew slightly in the first six months of the year to reach 57% of GDP, with an increase in bond issues denominated in euros, to protect against the strength of the dollar. “Public debt levels are at alarming levels in many (emerging) countries,” warns the IIF. “And even more worrying is the fact that the global financial architecture is not prepared to manage the risks associated with tensions in domestic debt markets.”
The drastic rise in interest rates —in the eurozone and the United States there is no precedent for such a rapid escalation in the price of money— It is being felt in the composition of the debt, with a loss of weight in bank credit to households and non-financial companies. “Higher inflation, rising borrowing costs and stricter credit standards have significantly reduced bank debt creation in recent months,” the IIF economists point out. In parallel, and as if they were communicating vessels, activity in private credit markets continues to expand “despite the greater scrutiny of regulators.”
Family debt in rich countries at two-decade lows
In cheap x-rays, the details are almost as important as the overall picture. Family debt shows two clearly differentiated patterns on a global scale: falling in the rich world; rising in the emerging block. While the surge in credit in countries like China, South Korea or Thailand keeps household debt-to-GDP at clearly higher levels than before the pandemic, in higher-income countries the trend is the opposite: there, the Family debt ratio fell in the first half of 2023 to its lowest level in two decades.
“Consumer debt remains at manageable levels in mature markets, and that offers additional room for central banks to continue monetary tightening should inflationary pressures persist,” the global banking association concludes.
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