Increasing world debt raises concerns about new global crisis

Reem Hosam El-din
4 Min Read

As the world goes through a variety of changes and crises of different kinds, one prominent issue that has recently come under the spotlight and become more noticeable than ever is the growing global debt.

Following the 2007-2008 financial crisis, there was hope for a combination of economic recovery, inflation, and austerity resulting in a decrease in debts.  However, it seems that this outlook was rather optimistic. Growth has been below par, inflation subdued, and austerity self-defeating.

Global interest rates are hiking and poor countries are becoming increasingly unable to pay back the money they borrowed from banks, which warns of a potential debt crisis on the horizon.

Global debt is defined as the money owed to the international community for providing loans in the form of economic aid, mainly to developing countries, with the aim of financing these countries’ economic development programmes and loans to cover their balance of payment deficits.

A report issued by the Institute of International Finance (IIF) in early January 2018, titled Global Debt Monitor showed that the global debt “hit an all-time high of $233tn in the third quarter (Q3) [of] 2017…Total debt across the household, government, financial, and non-financial corporate sectors increased by nearly $16.5tn in the first three quarters of 2017,” the report said. It was referring to the total debt incurred by the household, government, financial, and non-financial corporate sectors. The IFF report, however, noted that robust economic growth meant debt-to-gross domestic product (GDP) ratios were declining.

“A combination of factors including synchronised above-potential global growth, rising inflation (China, Turkey), and efforts to prevent a destabilising build-up of debt (China, Canada) have all contributed to the decline,” Bloomberg reported.

The $233tn global debt is considered rather shocking given that it is higher than the GDP of the world’s 100 largest nations.

According to the IIF, the greatest chunk, of $68tn, belongs to non-financial companies. The next bigger borrowers are governments across the world with $63 trillion, whereas financial institutions have $58tn of debt.

An important question to reckon with here is: who has the largest debt?

It seems that China, Russia, Korea, and Brazil have a heavy dollar-debt repayment schedule ahead of them in 2018. The Asian superpower’s debt is sparking fear amongst the other members of the global economic family, according to Express News.

“China, which has accounted for the lion’s share of new debt in emerging markets, saw the pace of debt accumulation slow; debt rose by 2% last year to 294% of GDP, compared to an average annual increase of 17% in the 2012-2016 period,” CNBC reported.

Interestingly, according to The Guardian, the issue of global debt nowadays is taking a rather new and different form. Global debt, at present, is private sector debt, and while as of yet, only a small group of countries are in serious trouble, the warning signs are clear. “The International Monetary Fund (IMF) and the World Bank both know it,” according to the Guardian.

The private non-financial sector debt hit all-time highs in Canada, France, Hong Kong, South Korea, Switzerland, and Turkey.

However, a bright side remains, especially with the recent upsurge in the number of Forbes billionaires under the age of 30, in addition to a more positive picture in China and other emerging markets, according to Seeking Alpha. As 2018 continues, more aspects of the world debt issue may unravel, indicating either improved world circumstances in terms of the global debt, or worse, as the debt soars.

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