The question debt globally it is hotter than ever: too much indebtedness of states and companiesa bomb is going to explode in the world?
The question is legitimate if we consider how much the financial situation has changed since the pandemic, with central banks rushing to change the course of monetary policy: from negative rates to the steeply rising cost of financing, what does it mean for corporate coffers and heavily indebted governments?
The situation is dangerous and a study by S&P Global Ratings on the situation explains it debt in the world: because this bomb can explode.
Record world debt
The report is clear in framing the emergency: “Resolving the debt overhang, amid slower growth and higher interest rates, could be painful, with governments being forced to cut spending and borrowers defaulting.”
This is how S&P Global Rating summarized the world situation on the debt front. Specifically in numbers, “Global financial debt is at an all-time high of 349% on a global debt-to-GDP basis, more than 25% up from 278% in the pre-2008 financial crisis era”.
Considering public administrations, households, financial institutions and non-financial companies, we have reached a debt peak of 349% in June 2022. In particular, thegovernment borrowing
has grown very aggressively since 2007, up three-quarters, to 102%.
The S&P chart highlighted the surge in debt levels of States (Government), households (Households), banks (financial corporates), private companies (non-financial corporates):
Debt/GDP in the world from 2007 to 2022
Focus on Governments, households, businesses, banks
Faced with these percentages, S&P Global Ratings foresees very hard times especially for corporate borrowers and for some Governments, now burdened with debts contracted in better times than this and the next.
States in the balance: from debt to default?
S&P Global focused on the situation of state debt. One of the key pillars to explain the higher levels of debt have been i interest rates very low maintained by
central banks in recent years.
This has allowed many sovereign states, most of them with low ratings, to access the capital markets for the first time. However, recent sharp increases in interest rates global are now a huge challenge. The weighted average interest burden has risen to almost 8% of government revenues.
The situation has worsened for nations with debt denominated in a foreign currency. The recent Sri Lankan default it is an example of this.
With the older ones central banks of the world as rates continue to hike, S&P expects more defaults or government debt restructurings in the next 12 to 18 months.
Not only that, the new dynamic on funding costs now underway presents challenges for even the most highly rated sovereigns, who have to struggle to maintain current assessments of their financial stability. “The recent negative outlook that we have attributed to the ratings of United Kingdom is an example of that”S&P recalled.
Finally, pay attention to what can happen in 2023. The debt bomb state can explode in different ways. According to S&P:
“The main challenge for the sector is the worsening of geopolitical tensions. This continues
feed theinflation and rate hikes, adds pressure to weakened fiscal positions, while at the same time further increasing the conditions for political polarization and social tensions, and the likelihood of sudden destabilizing events.”
These dynamics cannot simply be mitigated by public order measures and, for this reason, they represent important and non-negligible threats.
Companies with high debt: the alarm is in China
In the corporate debt sector, the spotlight has turned on China.
According to the S&P report, in the decade to June 2022, “Global leverage of non-financial corporations, as measured by the debt-to-GDP ratio, increased by 17% This was mainly driven by the 20% growth in corporate debt in China and in emerging markets”.
The Chinese question is not trivial and deserves attention: the debt of its companies is worth 27 trillion dollars in June 2022, representing 31% of the global corporate debt. Both developed and emerging markets have experienced increased leverage during Covid. But, unlike in almost all other economies, Chinese corporate debt has not decreased much in the 2021 recovery year, in fact it is increasing.
In 2023 the debt conditions of companies could get worse. The risk of recession, increasing margin pressures due to expensive inputs and weak demand, central banks further tightening monetary conditions, the Russia-Ukraine conflict and the China-US trade war point towards dark times.
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