MOSCOW, February 7 – RIA Novosti, Natalia Dembinskaya. Most countries will cope with the consequences of the coronavirus crisis this year. However, the worst is yet to come. The massive increase in government spending has resulted in a sharp rise in global debt. Central banks have kept rates low for now, but as soon as borrowing prices rise, the debt bomb could explode. When this happens and who will suffer first – in the material of RIA Novosti.
In 2020, in an effort to prop up an economy ravaged by the coronavirus pandemic, central banks have embarked on an unprecedented cut in interest rates. As a result, global debt skyrocketed by $ 19.5 trillion. This pace is an absolute record. For comparison, in 2018 there were 3.3 trillion, in 2019 – 10.8.
The national debt is now even greater than during the Second World War, experts from the Institute of International Finance (IIF), which unites more than 400 banks and credit organizations around the world, stated. According to preliminary estimates, we are talking about $ 277 trillion – this is a historical maximum.
One of the main reasons for this situation is low rates. Loans have become more affordable, which stimulates domestic demand and investment. But everyone is in debt – both governments and companies trying to borrow more and cheaper. Against this background, corporations, spurred on by unprecedented state support of the markets, launched an unprecedented sale of bonds, the IIF notes.
The matter is complicated by the fact that the lion's share of corporate securities has a very low reliability rating – only one notch higher than the “junk” rating. According to the credit rating agency Standard & Poor's, the investors hold such bonds for almost four trillion dollars.
Almost half of the increase in debt burden fell on advanced economies. The leaders are the USA, Great Britain, Eurozone, Japan, South Korea. The total debt of developing countries in the third quarter is 250 percent of GDP, China's – 305. Developed countries – 432.
“It is completely unclear how the global economy will reduce such exorbitant leverage in the future without significant adverse effects on economic activity,” the IIF said in a report.
The Institute of International Finance warns that the pandemic has sharply increased the risk of a refinancing crisis: many countries and companies are no longer able to attract new loans to pay off the previous ones. And since the IMF and the World Bank have spent huge amounts of money on anti-crisis programs, who will provide loans is unclear.
Among emerging markets, IIF experts are concerned about Lebanon, China, Malaysia and Turkey – there the largest growth in non-financial sector debt. Even at record low rates, declining government revenues have made loan servicing “much more burdensome.”
The head of the US Federal Reserve System (FRS) Jerome Powell also assessed the financial situation.
“Huge borrowing by governments and corporations during the pandemic served as a bridge across the economic chasm: quarantines, falling consumer spending, ship downtime, empty hotels and millions of unemployed. Cheap loans have allowed employees to pay money, not lay them off, and keep assets running. through borrowings, they also financed unemployment benefits for laid-off workers so that they could pay off their bills and buy food, “said the head of the Federal Reserve.
Meanwhile, it is the United States that has accumulated the most debt, which is dangerous for the world economy: 335 percent of GDP, or $ 80 trillion. There are about 28 of them – government loans. By 2028, Americans will spend only on interest a fifth of the state budget.
The budget deficit in fiscal 2020 (ended September 30) more than tripled to $ 3.1 trillion. According to forecasts, measures to combat coronavirus in the near future will bring it to four trillion. This will force to inflate the national debt, which threatens with defaults and bankruptcies.
According to the US Treasury Department, government spending rose 47 percent to a record $ 6.5 trillion. The government has launched an ambitious program to combat the effects of the pandemic and recession.
As the International Monetary Fund has warned, in the event of an economic crisis, almost 40 percent of corporate debt in large economies will default. In particular, in the USA, according to the estimates of the leading investment bank Goldman Sachs, the indicators will be worse than in the 2008 credit collapse.
“We are sitting on a bomb and we don't know when it will go off,” emphasizes Emre Tiftik, a debt specialist at the Institute of International Finance. Once the crisis subsides and central banks start raising rates, the world will be hit by a wave of defaults – perhaps the most devastating of all.