By Marc Jones
LONDON (Reuters) – The COVID pandemic added $ 24 trillion to the mountain of global debt last year, according to a new study, leaving it with a record $ 281 trillion and the world debt-to-GDP ratio at over 355% .
The Institute of International Finance’s global debt monitor estimated that government support programs accounted for half the increase, while global companies, banks and households added $ 5.4 trillion, 3.9 trillion and $ 2 , 6 trillion, respectively.
It meant that debt as a proportion of world economic production known as gross domestic product increased by 35 percentage points, to more than 355% of GDP.
This recovery is well beyond the increase seen during the global financial crisis, when 2008 and 2009 saw 10 percentage points and 15 percentage points respective jumps in debt in relation to GDP.
There are also few signs of short-term stabilization.
Lending levels are expected to stay well above pre-COVID levels in many countries and sectors again this year, supported by still low interest rates, although a reopening of economies should help on the GDP side of the equation.
“We expect the government’s global debt to increase by another $ 10 trillion this year and to exceed $ 92 trillion,” said the IIF report, adding that reducing support may also be even more challenging than after the financial crisis.
“Political and social pressure can limit governments’ efforts to reduce deficits and debt, putting their ability to deal with future crises at risk.”
“This can also restrict policy responses to mitigate the adverse impacts of climate change and the loss of natural capital,” he added.
Graph: Global debt hits a new record – https://fingfx.thomsonreuters.com/gfx/mkt/qzjvqgwxgvx/Pasted%20image%201613519778223.png
EUROPE DEBT
Debt hikes were particularly sharp in Europe, with non-financial sector debt-to-GDP ratios in France, Spain and Greece increasing by around 50 percentage points.
The rapid growth was driven mainly by governments, especially in Greece, Spain, Great Britain and Canada. Switzerland was the only mature market economy in the analysis of 61 IIF countries to register a decline in its debt index.
In emerging markets, China saw the biggest increase in debt rates excluding banks, followed by Turkey, Korea and the United Arab Emirates. South Africa and India saw the biggest increases only in terms of government debt ratios.
“The premature withdrawal of government support measures could mean an increase in bankruptcies and a new wave of bad loans,” said the IIF.
However, sustained reliance on government support can also pose “systemic risks” by encouraging so-called “zombie” companies – the weakest and most indebted corporations – to take on even more debt.
Graph: increase in COVID sovereign debt – https://fingfx.thomsonreuters.com/gfx/mkt/bdwpkneoyvm/Pasted%20image%201613519223728.png
(Reporting by Marc Jones; Editing by Toby Chopra)