"After a decade of slow growth and low interest rates, the world is awash in debt—issued by households, corporations, and especially governments. It is tempting to believe that with interest rates as low as they are today, including in emerging markets, much higher debt levels are sustainable indefinitely.” So wrote Maurice Obstfeld, University of California, Berkeley while commenting on the World Bank study titled “Global Waves of Debt: Causes and Consequences” published on 19th Dec, 2019.
As per the study, the global economy has experienced four waves of debt accumulation over the past fifty years. The first three debt waves ended with financial crises in many emerging and developing economies. The latest, since 2010, has already witnessed the largest, fastest and most broad-based increase in debt in these economies. Their total debt has risen by 54 percentage points of GDP to a historic peak of almost 170 percent of GDP in 2018. Current low interest rates mitigate some of the risks associated with high debt.
On average, that ratio has risen by about seven percentage points a year—nearly three times as fast it did during the Latin America debt crisis of the 1970s.
The analysis found that this latest wave is different from the previous three in several ways—it involves a simultaneous buildup in both public and private debt; it involves new types of creditors; and it is not limited to one or two regions. Some of the increase in debt has been driven by China, whose debt-to-GDP ratio has risen 72 points to 255 percent since 2010. But debt is substantially higher in developing countries even if China is excluded from the analysis—among EMDEs, it is twice the nominal level reached in 2007.
“The size, speed, and breadth of the latest debt wave should concern us all,” said World Bank Group President David Malpass. “It underscores why debt management and transparency need to be top priorities for policymakers—so they can increase growth and investment and ensure that the debt they take on contributes to better development outcomes for the people.”
“History shows that large debt surges often coincide with financial crises in developing countries, at great cost to the population,” said Ceyla Pazarbasioglu, the World Bank Group’s Vice President.
As per Pew Research Center, the corona virus pandemic is likely to add further to high government debt in some countries. The global economy is projected to shrink 3% this year – a downturn that would likely cause tax revenues to fall – even as governments in the United States, Europe and elsewhere spend trillions of dollars on emergency relief measures to try to contain the damage. The US Congressional Budget Office projected on April 28 that without policy changes, the federal debt-to-GDP ratio could rise to its highest level ever by the end of the 2021 fiscal year.
In most G7 countries, debt went up as a share of GDP in the years following the Great Recession. In the U.S., for example, debt accounted for 64% of GDP in 2006 but rose to more than 100% of GDP in 2012 and subsequent years. In Italy, where the coronavirus has taken a serious toll, government debt was already slightly higher than GDP (103%) leading up to the last recession in 2006. By 2013, debt had increased to 129% of Italy’s GDP, where it has essentially stayed since. Further, according to the IMF’s December analysis, public debt has also been on the rise in “low-income developing countries” too. On April 23, the United Nations’ trade and development panel warned of a “looming debt disaster” in developing countries.
With greater focus on staving off the current economic crisis, it is likely that the looming debt crisis will continued to be ignored, until possibly it is too late.
Or, maybe its about time we began to earnestly explore other, more sustainable options.