IMF warns of potential financial risks as global debt hits $226 trillion

• IMF said 90% of the surge in borrowings are from developed countries and China

• It said debt was needed to protect livelihood and avoid a wave of bankruptcies during the pandemic

The International Monetary Fund (IMF) on Wednesday said the global debt surged to $226 trillion in 2020, the biggest ever one-year jump since World War II, mainly due to the COVID-19 pandemic and a deep recession.

In a blog post, the IMF said the debt jumped 256% of global GDP last year, increasing 28 percentage points.

The officials said the risks would be magnified “if global interest rates rise faster than expected and growth falters.”

Debt in 2020

The report said in advanced economies, government borrowing rose from around 70% of GDP, in 2007, to 124% of GDP, in 2020 and private debt from non-financial corporations and households rose from 164% to 178% of GDP in the same period.

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Both the government and private entities in developed countries and China borrowed about 90% of the $28 trillion debt surge in 2020, enabled by low-interest rates.

While in advanced economies, government borrowing rose 19 percentage points of GDP, in 2020, the same what seen during the financial crisis in 2008, private debt jumped by 14 percentage points of GDP, almost twice when compared to 2008.

IMF said, during the pandemic, governments and central banks supported further borrowing by the private sector to help protect lives and livelihoods.

On the other hand, public debt rose less in emerging markets and low-income developing countries, hampered by higher borrowing costs and limited access to funding.

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Debt sustainability

IMF’s Fiscal Affairs Director Vitor Gaspar, Fiscal Affairs Chief Paulo Medas and Senior Economist Roberto Perrelli warned that higher interest rates would diminish the impact of increased fiscal spending and cause debt sustainability concerns to intensify.

“A significant tightening of financial conditions would heighten the pressure on the most highly indebted governments, households, and firms. If the public and private sectors are forced to deleverage simultaneously, growth prospects will suffer.”

Picture Credit: Reuters