What are the reasons for the rise in global debt?

What are the reasons for the rise in global debt?

Subject :Economy

Section: External Sector

Source: TH

Context:

• Global debt rose to an all-time high of $307 trillion in the second quarter, by the end of June 2023, the Institute of International Finance (IIF) said in a report.

Global debt:

• Global debt refers to the borrowings of governments as well as private businesses and individuals.
  • Governments borrow to meet various expenditures that they are unable to meet through tax and other revenues and to pay interest on the money that they have already borrowed to fund past expenditures.
  • The private sector borrows predominantly to make investments.
• Global debt has risen by about $100 trillion over the last decade. Further, global debt as a share of gross domestic product (GDP) has started to increase once again to hit 336% after dropping quite steeply for seven consecutive quarters.

Why is it rising?

• Both global debt in nominal terms and global debt as a share of GDP have been rising steadily over the decades.

Reason: Due to the rising interest rates (as a result of the increase in oil prices), which was expected to adversely affect demand for loans.

• • Most (over 80%) of the rise in global debt in the first half of the year has come from advanced economies such as the U.S., the U.K., Japan, and France.
  • Among emerging market economies, China, India and Brazil have seen the most growth in debt.
• Probable consequence of rising global debt: 
  • It will increase the costs of debt servicing for developing countries.
• But a rise in debt levels over time is to be expected since the total money supply usually steadily rises each year in countries across the globe.
• Even a simple rise in the total amount of savings in an economy can cause a rise in debt levels as these increased savings are channeled into investments.

Inflating away of debt:

• It refers to the phenomenon wherein the central bank of a country either directly or indirectly uses freshly created currency to effectively pay off outstanding government debt by, for example, purchasing government bonds in the market.
• But the creation of fresh money causes prices to rise, thus imposing an indirect tax on the wider economy to pay the government’s debt.

Is it a cause of worry?

• Concern over the sustainability of such debts, mainly government debts, as the government borrows money to fund populist policies and when the central bank raises the interest rates, it will become difficult for the government to service their debts.
• As the interest rate is extremely low, particularly in western economies, debt servicing remains largely manageable.
• Now, due to high inflation, the central banks are increasing interest rates, that may cause a worry.
• In its report, the IIF has also warned that the international financial infrastructure is not equipped to handle unsustainable domestic debt levels.
• Unsustainable private debts sometimes lead to unsustainable economic booms like the 2008 global financial crisis.

Institute of International Finance (IIF):

• The IIF is the global association of the financial industry, with about 400 members from more than 60 countries.
• The IIF provides its members with innovative research, unparalleled global advocacy, and access to leading industry events that leverage its influential network.
• Its mission is to support the financial industry in the prudent management of risks; to develop sound industry practices; and to advocate for regulatory, financial and economic policies that are in the broad interests of its members and foster global financial stability and sustainable economic growth.
• IIF members include commercial and investment banks, asset managers, insurance companies, professional services firms, exchanges, sovereign wealth funds, hedge funds, central banks and development banks.