Market Overview

The pandemic of coronavirus pushed global debt levels to new highs of $272 trillion in the third quarter of 2020, rising by 6.7%, an unprecedented level since 2016. The level of the global debt is expected to top $277 trillion by the end of 2020, according to the Institute for International Finance (IFF) Global Debt Monitor. This would represent a debt-to-GDP ratio of 365%.

In 2019, IFF recorded the rise of the global debt by $10 trillion or just 4% to $255 trillion. Global GDP last year, according to the United Nations data, rose by 2.3% only. According to the International Monetary Fund (IMF) projections, global GDP will drop by 4.4% this year. So, the increase in the debt levels significantly outperformed the rise of the global economy for the last two years.

Reasons for such divergence could be found primarily in the central banks’ intentions to stimulate growth around the world. That might sound paradoxical, but no other solutions to spur growth has been successful in the modern era. Some bright exclusion might present China as a global manufacturing state for the rest of the world, where the rise of the financial sector debt was not the major contributor to the overall debt load. Developed nations are those that contributed the most in stockpiling borrowings. Their debt-to GDP ratio surged above 432% of GDP in the third quarter of 2020— a 50 percentage points increase from 2019. The United States with one of the biggest stimulus packages in the world is responsible for almost half of this rise. In the euro zone, government borrowings led to an increase of $1.5 trillion in public debt over the same period, reaching $53 trillion. But, this level is still below record $55 trillion in 2014 in times of the sovereign debt crisis.

Emerging economies debt levels rose to over 248% of GDP, with Lebanon, China, Malaysia and Turkey experiencing the biggest rises in non-financial-sector debt.

Majority of the world’s central bank moved to ultra-soft monetary policy in 2020 keeping the interest rates low while pumping enormous liquidity into national economies. These measures are designed to help state budgets, companies, households to access cheap loans, stimulate consumer and business activity, elevate demand for goods and services and boost investments. In such a way, a stockpiling debt is a preventive response to the development of the economy.

Before the pandemic severely spread across developed nations, the global debt had risen to $258 trillion or by 1.2%.  Now, according to the IIF estimates, it would rise by 7.9%. Such a record increase of the debt level this year happened mainly because of the pandemic. Nations across the world are tackling its consequences compensating losses of companies and people. Advanced countries are conducting loose budget and monetary policy that nudges debt levels to rise even further.

This trend may be suspended if the global economy significantly overruns the pace of the debt increase. IMF forecasts that the global economy would shrink by 4.4% this year and return next year with a rise of 5.2%. So, the debt increase over the global growth would be guaranteed for several years to come. However, the margin between the debt rise and global growth may ease starting at 2021.

This situation poses significant risks These risks may surface in massive defaults at different levels of the economy with local debt crisis. Therefore, such uncontrolled spread of the indebtedness may trigger vast damage to the financial system, banks and production entities as the number of “zombie” firms that do not generate profits is skyrocketing.

Another paradox is that the stimulation of growth by rising debt levels may lead to a very opposite result – the limitation of growth by over rising delinquencies.

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