Global debt near record highs as the new monetary era triggers ‘crisis of adaptation’

Global debt near record highs as the new monetary era triggers ‘crisis of adaptation’

HIROSHIMA, JAPAN – MAY 17: People walk under a banner promoting the Group of 7 (G7) Summit on May 17, 2023 in Hiroshima, Japan. The G7 Summit will take place in Hiroshima from May 19th to 22nd. (Photo by Tomohiro Ohsumi/Getty Images)

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Global debt grew by $8.3 trillion in the first quarter to a near-record high of $305 trillion as the global economy faced an “adjustment crisis” to rapid monetary tightening by central banks, the report said a closely watched report by the Central Bank’s Institute for International Finance.

The financial industry association said the combination of such high levels of debt and rising interest rates has pushed up the cost of servicing that debt and raised concerns about the indebtedness of the financial system.

Central banks around the world have been raising interest rates for over a year in a bid to stem soaring inflation. The US Federal Reserve raised interest rates earlier this month to a target range of 5% to 5.25%, the highest level since August 2007.

“With the most tightening financial conditions since the 2008-2009 financial crisis, a credit crunch would result in higher default rates and more ‘zombie firms’ – already an estimated 14% of US-listed companies,” said the IIF in its quarterly Global Debt Monitor report. Report late Wednesday.

The sharp rise in global debt burdens in the three months to the end of March marked the second consecutive quarterly increase after two quarters of sharp declines during last year’s aggressive monetary tightening. Non-financial corporations and the government sector were key contributors to the recovery.

“At nearly $305 trillion, global debt is now $45 trillion above pre-pandemic levels and is expected to continue to rise rapidly, despite concerns over a potential credit crunch following the recent turmoil in the US and Swiss banking sectors the government’s borrowing needs remain high,” the IIF said.

The Washington, DC-based organization said an aging population, rising healthcare costs and significant gaps in climate finance are putting pressure on government balance sheets. Rising geopolitical tensions mean national defense spending is likely to increase in the medium term, potentially impacting the credit profiles of both governments and corporate borrowers, the IIF predicted.

“If this trend continues, it will have a significant impact on international debt markets, especially if interest rates remain high for longer,” the report said.

Total emerging market debt hit a new record above $100 trillion, about 250% of GDP, up from $75 trillion in 2019. China, Mexico, Brazil, India and Turkey were the largest contributors to the increase.

In developed markets, Japan, the US, France and the UK posted the strongest gains over the quarter.

Banking turmoil and an “adjustment crisis”

The rapid tightening of monetary policy has exposed the weak liquidity positions of a number of small and medium-sized banks in the US, prompting a series of failures and bailouts in recent months. The resulting market panic eventually spread to Europe, forcing the Swiss giant’s emergency sale Swiss credit To UBS.

The IIF suggested that companies had gone through a “crisis of adjustment” to what it called the “new monetary system”.

“Although recent bank failures appear idiosyncratic rather than systemic – and US financial institutions have much less debt (78% of GDP) than they were in the run-up to the 2007-2008 crisis (110% in 2006) – fears of contagion are too significant Problems have led to deposit withdrawals from US regional banks,” the IIF said.

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“Given the central role of regional banks in originating credit in the US, concerns about their liquidity positions could lead to a sharp contraction in lending to some segments, including underserved households and businesses.”

This tightening of credit conditions could hit small businesses in particular, the IIF said, leading to higher default rates and more “zombie firms across the board.”

Zombie companies are companies whose profits are sufficient to continue operations and pay the interest on its debt, but not to pay off the debt, meaning the money earned is immediately spent on debt. The company is therefore “neither dead nor alive”.

“We estimate that about 14% of US companies can be considered zombies, with a significant portion of them in the healthcare and information technology industries.”