The abyss of credit: world debt reached a record $ 255 trillion

The size of world debt reached its maximum level in the entire history of observations. As calculated at the American Institute of International Finance (IIF), in 2019 the figure increased by almost $ 10 trillion and amounted to $ 255 trillion.

World debt is the total debt of the population, companies, financial institutions and governments of all countries. According to IIF experts, today the corresponding amount is more than three times the size of the global economy.

“Currently, world debt is more than 322% of global GDP - that is, 40 percentage points ($ 87 trillion) higher than at the beginning of the financial crisis of 2008," the organization’s study said.

According to experts interviewed by RT, one of the main reasons for the growth of global debt was the monetary policy of central banks. In 2019, regulators began synchronously lowering interest rates to stimulate business activity and economic growth. Over time, the actions of central banks should lead to cheaper loans, increased domestic demand and investment. Meanwhile, such actions run the risk of over-lending to countries.

“In conditions of reduced rates and soft policies of world central banks, companies willingly continued their loan expansion. In 2019, corporations increased their loan portfolio by $ 2.8 trillion, although global GDP growth slowed. In other words, the companies didn’t really need financing, but they were bribed by record low interest rates, ”said Sergey Deineka, financial analyst at BCS Premier, in an interview with RT.

At the same time, from the beginning of 2020, world debt continued to grow steadily due to the development of the coronavirus pandemic, experts say. According to the official data of the World Health Organization (WHO), the total number of people infected in the world exceeded 1.28 million, more than 72 thousand people died.

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The spread of the disease and quarantine measures introduced by states provoked a massive reduction in the volume of trade and passenger traffic in the world. Analysts at the Asian Development Bank forecast global pandemic losses of $ 4 trillion. Against this background, the International Monetary Fund has already announced the beginning of a recession in the global economy, and IIF experts expect global debt to grow to 342% of GDP by the end of the year.

“Monetary authorities, such as the US Federal Reserve or the European Central Bank, are trying to flood their economies with money to deal with the effects of the coronavirus. But in the end, such a policy can lead to an even bigger credit bubble, which runs the risk of bursting at any time, ”said Dmitry Gelemurzin, Executive Director of Goldman Group, in a conversation with RT.

A similar assessment is shared by IIF experts. According to experts, over the past 12 years, the debt burden of world governments has grown more intensively than the debts of the population and business. So, from 2007 to 2019, world government debt doubled - from $ 35 trillion to $ 70 trillion.

“Given the stagnation of national economies amid the pandemic of the virus, the authorities will continue to increase their debt portfolios in order to fulfill their social obligations and to support industry and business. As a result, following the results of 2020, the total volume of world debt can grow from the current $ 255 trillion to $ 270 trillion, ”Sergey Deineka believes.

Note that the total debt of developed countries is about $ 184 trillion (383% of GDP) and more than doubles that of developing countries - $ 71 trillion (219% of GDP).

At the same time, among developed countries, the USA, Japan and the eurozone countries are experiencing the heaviest debt burden. According to IIF, in the United States, government, citizen, and business debt exceed 327% of a country's GDP. In the eurozone, the value is 391% of GDP, in Japan - 548%.

“Even before the pandemic, developed countries were actively borrowing. Such a policy made it possible to spend money without much thought on the development of various enterprises. But now, due to the virus, industrial production has declined by more than a third, and part of the plants is worth it. As a result, enterprises do not make a profit, and the volume of loans remains the same. As a result, governments faced a difficult choice: to support the production of money or to allow their bankruptcy. Both scenarios run the risk of exacerbating the financial crisis, ”said Finam Group analyst Alexei Korenev.

Shock protection

It is curious that Russia has one of the lowest levels of debt in the world today. According to IIF estimates, at present, the country's total debt burden is only 90% of GDP.

According to Alexei Korenev, Moscow began to noticeably reduce its dependence on foreign loans after the 1998 default. So, instead of obtaining loans from international financial organizations, Russia began to increase the volume of foreign exchange reserves. Such a policy allowed the country to create a financial airbag in case of external shocks.

“Since the 2000s, Moscow has decided to make early payments on debts to the International Monetary Fund. The government also paid off other debt obligations, which were inherited from the USSR. Such a policy allowed us to build up significant financial resources for the country, which can help us survive the crisis. Given the observed trends in the global economy, Russia's financial airbag will last for five or six years, ”concluded Korenev.