Plea for restrained spending as global debt hits record high

Global debt rose by around $1.3 trillion (€1.2 trillion) in the first three months of this year, reaching a new record high of $315 trillion (€293.5), according to a new report by The Institute of International Finance (IIF).

After three consecutive quarters of decline, the global debt-to-GDP ratio resumed its upward trajectory from January to March.

Emerging markets are driving the trend, claimed the IIF, with the biggest increases coming from China, India and Mexico.

Mature markets, whilst they recorded smaller increases, nonetheless have higher levels of indebtedness compared with emerging economies.

The IIF counts the US, the Euro Area, Japan, and the UK as mature markets.

Solely for developed economies, the largest increases in debt this quarter were recorded in the US and Japan, followed by Ireland and Canada. Declines were observed in Switzerland and Germany.

High interest rates strain state budgets

Looking at debt by sector, government spending drove up the totals in mature markets this quarter as interest rates remain historically high.

Elevated rates can increase state debt as the cost of borrowing increases for governments, running down state budgets.

A stronger performance in other sectors, however, mitigated state debt in several developed economies, according to the IIF.

“Total debt levels in mature markets remained broadly stable in Q1, as a reduction in debt by households and non-financial corporations offset the continued rise in government and financial sector indebtedness.”

Trade tensions could fuel inflation

Looking forward, the group also warned that global debt could be further inflated because of “rising trade friction and geopolitical tensions”.

It specifically noted that mass exports of green technology from China, which have been fuelling protectionist tendencies in Europe, could drive up debt.

If Europe decides to impose tariffs of Chinese products essential to the green transition, this will likely push up prices for imported and domestic goods.

This could in turn fuel wider inflation, also boosted by a global scramble for limited raw materials.

Another debt risk, according to the IIF, is that a change in EU monetary policy could strengthen the dollar. This means that it would be more expensive for countries to repay dollar-denominated debts.

“An abrupt policy shift … could trigger a USD rally, drive further capital flight to U.S. assets, and exert additional pressure on the balance sheets of non-US borrowers with significant USD debt,” said the IIF.

A call for fiscal prudence

Countries can be pushed further into debt because of high interest rates but large piles of debt also increase interest fees, meaning that nations can find themselves stuck in a vicious circle.

Last month, the International Monetary Fund (IMF) – like the IIF – sounded the alarm bell over debt burdens.

“Countries need decisive efforts to safeguard sustainable public finances and rebuild fiscal buffers,” the group warned.

“Governments should immediately phase out legacies of crisis-era fiscal policy, including energy subsidies, and pursue reforms to curb rising spending while protecting the most vulnerable. Advanced economies with ageing populations should contain spending pressures for health and pensions through entitlement reforms and other measures.”

As more than 50 countries hold significant elections during 2024, governments are leaning towards tax-cutting, cash-splashing policies.

When trying to please voters, the IMF warns that policy makers shouldn’t lose sight of long-term goals.