Global debt rose to a record $ 281 trillion in 2020 – 3.5 times the size of the global economy itself. One of the main reasons is the sharp increase in government spending due to the pandemic. The size is already critically large, but this is not the limit: in a year and a half, the volume of loans may grow to $ 300 trillion. Izvestia has found out what is fraught with such a number of debts, under whom the debt bomb risks exploding first and how stable the Russian debt is.
In 2020, in an attempt to support the economy destroyed by the coronavirus pandemic, the central banks of different countries went for an unprecedented cut in interest rates, and governments began to increase public spending.
As a result, global debt soared by $ 24 trillion in 2020 to $ 281 trillion. This is 355% of world GDP, according to the Institute of International Finance (IIF). Such high rates of debt growth have become record-breaking. For comparison, $ 10.8 trillion was added in 2019, and $ 3.3 trillion in 2018.
Almost half of the increase in debt burden fell on advanced economies. The leaders are the USA, Japan, the Eurozone, Great Britain, South Korea. So, in the UK and France over the past year, the level of public debt to GDP reached 100.5 and 116%, respectively. Japan, the second largest country in the world in terms of government debt after the United States, has the highest debt-to-GDP ratio at 240%. The ratio of developing countries’ debt to their GDP has reached 250%. China has become the leader in the growth of debt-to-GDP ratios, and Turkey and the UAE are also on the list.
Not only governments, but also companies got into the debt trap, taking advantage of low rates to borrow more and cheaper. Against this background, corporations, spurred on by unprecedented state support of the markets, launched an unprecedented sale of bonds, the IIF notes.
“For example, in the United States in 2020, the volume of corporate debt with low credit quality (rating BB and below) became a record one, which in a few years may develop into a bubble if companies experience problems with debt repayment,” said QBF analyst Ksenia Lapshina.
“It is completely unclear how the global economy will reduce such exorbitant leverage in the future without significant adverse effects on economic activity,” the IIF said in a report.
Actually, there is no need to talk about debt reduction yet – debt appetites will only grow. According to the Institute of International Finance, in the next year and a half alone, the global debt may surpass the $ 300 trillion threshold.
Analysts point out that there is nothing unusual about the increase in the volume of debt, the debt economy has long been our reality. Another thing is the ability to serve it, be it an individual, a company or a state, and this is exactly what problems can arise.
As explained at the Institute of International Finance, due to the pandemic, the risk of a refinancing crisis has sharply increased: many countries and companies are no longer able to attract new loans to pay off what they have already collected. And since the International Monetary Fund and the World Bank have spent a lot of money on anti-crisis programs, who will be able to provide new loans is not yet very clear.
Developing countries with limited financial resources and weak growth potential found themselves in the most difficult conditions.
Among emerging markets, IIF experts are concerned about Lebanon, China, Malaysia and Turkey: there the largest growth in non-financial sector debt. Even at record low rates, the decline in government revenues made loan servicing “much more burdensome.”
“The main risk group is the countries with the lowest credit ratings, as well as those that have already experienced technical defaults in 2020. These are most of the countries in tropical Africa. In Latin America, these are primarily Venezuela and Ecuador. From the large countries of Asia and the East – Pakistan, Egypt, Turkey, Iraq. In Europe – Ukraine ”, – says Valery Yemelyanov, an analyst with Freedom Finance.
“Developing countries with weak currencies and high inflation have risks for public external debt: Turkey, Mexico, Brazil, Argentina,” adds Ksenia Lapshina.
If the cost of debt servicing does not rise, no major threats are foreseen. However, the situation could become dangerous as soon as the Central Banks inevitably start raising rates as the economy recovers.
Any increase in rates will add up the markets like a house of cards. And it will happen sooner or later and lead to extremely serious consequences. In the medium term, we will face events similar to the Great Depression of the 1920s and 1930s, warns Semyon Tenyaev, the general director of the VBC group.
Russia is safe
What does Russia look like in all this debt history? The national debt of our country grew by almost 40% over the past year – by 5.4 trillion rubles, to 18.99 trillion rubles. The reasons are the same: increased government spending on supporting the economy, plus a drop in revenues from the sale of oil and gas, due to which budget expenditures exceeded revenues by more than 4 trillion rubles.
However, there is still nothing to worry about: the ratio of public debt to GDP in Russia is still one of the lowest in the world – only 17.8% of GDP. This is a completely safe level, which speaks of the stability of the Russian financial system.
“The structure of Russia’s debt is not quite typical. It is formed for the most part by corporate debt. The debts of the population and the state account for less than a quarter of the total amount. A similar picture is observed in Scandinavia, Switzerland, Hong Kong. In any case, the total debt burden of Russia is small: it is less than a third of GDP. The country is generally less indebted than Germany, which has one of the lowest debts among developed countries, ”explains Valery Emelyanov from Freedom Finance.
Analysts point out that the concern could be caused by the Russian national debt in foreign currency, since the depreciation of the ruble increased the cost of servicing it, or the external debt of the private sector. However, even here the situation is controllable.
“Despite the crisis associated with the pandemic, in 2020 there was a reduction in the total external debt of Russia by 21.3 billion – to $ 470.1 billion. A decrease in the debt burden was observed in all sectors of the economy, and the most noticeable decrease in debt on loans, so we have we do not observe threats to the country’s solvency, “says Irina Aydrus, head of the International Finance program at the RUDN University Institute of World Economy.
Thus, the Russian Federation remains a reliable borrower in the eyes of international lenders and investors.