Global debt hits record $305 trillion, interest rate hike threatens emerging markets

Pressured in the last two years by spending related to the pandemic, the global debt of governments, companies, banks and families reached an all-time high in dollars in the first quarter of 2022: US$ 305.3 trillion.

The record comes at the end of a decade in which world indebtedness systematically rose above the growth rate of countries: for every US$ 1 more in debt, global GDP increased by US$ 0.27 in the period, according to a report released this week. Wednesday (18) by the IIF (International Finance Institute), which brings together 450 banks in 70 countries.

The unprecedented mark is reached as the US begins a cycle of raising interest rates to fight inflation. The move should make it more expensive and difficult for many countries to refinance their debts, especially those denominated in dollars, as the currency tends to appreciate with high US interest rates.

According to the IIF, the share of global indebtedness of emerging countries is approaching US$ 100 trillion for the first time. This year, they have combined payments worth $5.5 trillion — many with significant foreign-currency tranches.

Argentina and Chile, for example, have debts in dollars and euros (from companies, banks and governments) equivalent, respectively, to 56% and 62% of their GDP. Turkey, with 97%, is the emerging region most exposed to turmoil in the international market.

Brazil appears in a comfortable situation, with debts in foreign currency equivalent to 27.5% of GDP. The largest share (15.4%) refers to the indebtedness of non-financial companies. Banks account for 8.2%, and the government for 4% – which greatly limits the impact of the global interest rate hike on public debt.

Overall, since the start of the pandemic in 2020, the global debt of governments that have adopted policies to mitigate its effects has increased by 14 percentage points ($17.4 trillion) — and could continue to rise.

According to Clay Lowery, vice president of the IIF, the current surge in commodity prices could force many countries to increase spending to avoid internal protests and unrest, especially if economic growth slows going forward – something expected due to the effect of the global interest rate hike. .

The current process of rising interest rates in the US must be accompanied by other countries with inflationary problems (as Brazil has already been doing for a few months) and to contain sudden outflows of capital towards US Treasury bonds — safe in moments of uncertainty, and which are becoming more attractive to investors.

In the first four months of the year, for example, international investors dumped a record $35 billion in Chinese yuan-denominated bonds behind rising yields in the US.

According to the IIF, the tendency for investors to flee to safer markets has been increasing and, in order to avoid such movements, many central banks of countries may also raise interest rates from now on (in addition to fighting inflation).

“As central banks follow the trend of raising interest rates, the costs of debt refinancing should increase the vulnerability of some countries”, says the IIF.

The institute considers that, although global indebtedness has exceeded US$ 300 trillion, there has been a reduction (of 15 percentage points, compared to the beginning of 2021) when taking into account its volume in relation to global GDP.

But that only happened because world inflation inflated the size of economies, a movement that may have its days numbered because of higher interest rates, the drop in the pace of price increases and the disruptions caused by the war in Ukraine.

“The effects of the war between Russia and Ukraine are likely to continue to disrupt global economic activity, and growth is expected to slow significantly this year, with negative implications for global debt dynamics,” the IIF says.