Pandemic piles fresh $24trln to global debt mountain

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Global debt has surged to new all time highs on the back of the on-going Covid-19 pandemic, Reuters said quoting a report of the Institute of International Finance. The overall debt mountain has peaked to$281trln driving world debt to GDP ratio above 355%.

IIF figures showed that the main factors behind the raise were several government stimulus programmes aimed to offset pandemic’s influence related to economic slowdown. The government support schemes equaled for half of the surge, while global firms, banks and households added $5.4 trillion, 3.9 trillion and $2.6 trillion respectively.

Furthermore debt levels are seen exceeding the pre-Covid levels in many countries, regions and sectors. The rush for funds is stimulated by the record low borrowing interest rates.

“We expect global government debt to increase by another $10 trillion this year and surpass $92 trillion,” the IIF report said, adding that winding down support could also prove even more challenging than it was after the financial crisis. “Political and social pressure could limit governments’ efforts to reduce deficits and debt, jeopardizing their ability to cope with future crises.” “This could also constrain policy responses to mitigate the adverse impacts of climate change and natural capital loss,” it added.

Debt rises were particularly sharp in Europe, with non-financial sector debt-to-GDP ratios in France, Spain, and Greece increasing some 50%. The rapid build-up was mostly driven by governments, particularly in Greece, Spain, Britain and Canada. Switzerland was the only mature market economy in the IIF’s 61-country analysis to record a decline in its debt ratio. In emerging markets, China saw the biggest rise in debt ratios excluding banks, followed by Turkey, Korea, and the United Arab Emirates. South Africa and India recorded the largest increases just in terms of government debt ratios. “Premature withdrawal of supportive government measures could mean a surge in bankruptcies and a new wave of non-performing loans,” the IIF said.

However, sustained reliance on government support could pose “systemic risks” as well by encouraging so-called ‘zombie’ firms - the weakest and most indebted entities to take on even more debt.

More on this subject: Coronavirus

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