Monetary Spiral: Global Debt May Reach Record $ 275 Trillion In 2020

In 2020, the size of global debt may increase by at least $ 20 trillion compared to 2019 and reach its highest level on record. Experts from the American Institute of International Finance (IIF) told RT about this.

"If the spread of the coronavirus virus cannot be contained and quarantine measures continue to operate, it is likely that due to a sharp increase in government debt and debts of state-owned companies, the amount of global debt will exceed $ 275 trillion," Emre Tiftik, director of research for sustainable development at IIF, told RT.

Global debt is the total debt owed by individuals, companies, financial institutions, and governments in all countries. According to the IIF, in 2019 the figure increased by almost $ 10 trillion to $ 255 trillion.

“Even before the pandemic, world central banks reduced and kept key rates at a minimum level due to slow economic growth and chronic budget deficits, for example, in the United States and several European countries. This soft credit policy was used by corporations and households to build up loans. New debts ensured expansion of business activity, ”explained Alexey Kiriyenko, managing partner of EXANTE in a conversation with RT.

Meanwhile, the growth of global debt accelerated noticeably in March 2020 against the backdrop of measures taken by a number of states to combat COVID-19. In the first quarter, the corresponding amount increased to $ 258 trillion, or 331% of world GDP. Thus, the figure is currently more than three times the size of the global economy.

According to Johns Hopkins University, to date, the number of detected cases of coronavirus infection in the world has exceeded 21.7 million.The spread of COVID-19 and the quarantine measures introduced in many states provoked a massive reduction in trade and passenger traffic in the world. Analysts at the Asian Development Bank estimate global losses from the pandemic at about $ 9 trillion, and the International Monetary Fund predicts a drop in the global economy of nearly 5% in 2020.

“Debts of governments are increasing due to the growth of government spending to support the economy and social sphere in the context of the coronavirus. At the same time, the growth of corporate debts is due to the fact that companies now need funds to maintain their business and refinance previously received loans, "Natalya Milchakova, deputy head of the Alpari information and analytical center, explained in an interview with RT.

The actions of world central banks should partly restrain the fall of the world economy. In the spring, regulators in a number of developed countries launched a quantitative easing program. Thus, they are trying to increase the money supply in the economies of their countries and thereby compensate for the losses from the reduction in business and consumer income. At the same time, the policy of central banks leads to an additional increase in the debt of countries, says Aleksey Kiriyenko.

“Governments and corporations are taking full advantage of the situation, increasing borrowing in the markets as much as they can in response to historically low interest rates and unprecedented programs to inject money into the financial systems of their countries,” the expert added.

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Financial Pyramide

Note that at the beginning of April 2020, the total debt of developed countries amounted to about $ 185.4 trillion (392% of GDP) and more than doubled the figure for developing countries - $ 72.6 trillion (230% of GDP).

At the same time, among the developed countries, the USA, Japan and the states of the eurozone are experiencing the heaviest debt burden. The IIF estimates that in the United States, the debt of the government, citizens and businesses exceeds 341% of the country's GDP. In the eurozone, the value is 391% of GDP, in Japan - 562%.

“Over the past years, developed countries have had to borrow more and more to maintain the growth of the world economy. And in order to now pull the global economy out of the recession, the volume of loans has to be increased to gigantic proportions. What is happening more and more resembles a classic financial pyramid, which sooner or later may collapse, "- told RT head of the analytical department of AMarkets Artyom Deev.

By the end of 2020, the volume of global debt may amount to 350% of global GDP, Aleksey Kiriyenko admits. According to the expert, this state of affairs may lead to a slowdown in economic development after the pandemic.

Protective reserve

It is noteworthy that Russia has one of the lowest debt levels in the world today. According to IIF estimates, in the first quarter of 2020, the country's total debt burden was only 96% of GDP.

Moscow began to noticeably reduce its dependence on foreign loans after the 1998 default. So, instead of receiving loans from international financial organizations, Russia began to increase the volume of gold and foreign exchange reserves. This policy allowed the country to create a financial cushion against external shocks. This was told to RT by the head of the laboratory of the Institute of Applied Economic Research, RANEPA, Alexander Abramov.

At the beginning of August, the total amount of gold and foreign exchange reserves of Russia exceeded $ 600 billion. The value became a record since the moment of statistical observations. This is evidenced by the data of the Central Bank.

“Russia has a different strategy for conducting public finances in comparison with developed countries. After the 1998 crisis, we began to be more cautious about the possibility of financing the economy by increasing the debt burden. A similar practice is currently valid in many developing countries. After the events of the late 1990s, many of them realized that it is better to have a large gold and foreign exchange reserve, which allows you to get out of almost any difficult situation, "concluded Abramov.