The Global Debt Trap: $315 Trillion and Counting, Is a "Black Swan" Crisis Inevitable?
THE WORLD’S GROWING DEBT PROBLEM & WHY YOU SHOULD CARE
Key Points Covered:
Here is an equation for you to ponder -
Global Debt > 3x Global Annual Economic Output?
The world is drowning in debt. An unprecedented crisis is upon us - a potential ???"black swan" event with a wave of sovereign debt defaults that could crash global economies. Global debt hit a record high of $315 trillion in 2023, according to the Institute of International Finance (IIF). This debt burden, which combines borrowings from households, businesses, and governments, is now equivalent to over three times the ????global GDP of $109.5 trillion.?
If divided among the world's 8.1 billion people, each person would owe about $39,000 in debts.
Around two-thirds of this debt originates from mature economies, with ???? Japan and the ???? United States contributing the most.? The sheer scale and pervasiveness of this debt make it a systemic risk to the global financial system.
What is a Black Swan Event?
A Black Swan Event is a term coined by Nassim Nicholas Taleb, a finance professor and former Wall Street trader, to describe a rare and unpredictable event that has severe consequences. These events are characterized by their extreme rarity, massive impact, and the widespread insistence they were obvious in hindsight.
Examples of such events in our global economic history:
We dodged major economic bullets here: the 2011 Greek Debt Crisis, the 2013 U.S. Debt Ceiling Crisis, and Brexit's recessionary threat to the UK.
WHAT IS THIS BLACK SWAN EVENT?
Global Debt Trends in previous years cumulatively
The current debt situation is the result of a long-term trend, with four major waves of debt accumulation since the 1950s.?
In 2020 alone, global debt surged by a record 28 percentage points to 256% of GDP, the largest single-year increase since World War II. ??
Scale of global debt
The debt burden is not evenly distributed across the world. Developed economies, particularly the U.S., Japan, the UK, and France, account for the bulk of the debt, with around ????$210 trillion?concentrated in these mature markets.?
However, emerging markets are not immune. Their debt-to-GDP ratio hit a ???new high of 257% in 2023, with China, India, and Mexico being the biggest contributors. China's case is particularly alarming, with its total debt rising to 272% of GDP in 2022, 25 percentage points higher than pre-pandemic levels. The country's rapid debt accumulation over the past decade has been a significant driver of the global debt surge.
What about the developing countries?
But beneath these alarming headline figures lie an even more concerning trend - the disproportionate impact on developing countries.
Developing countries are increasingly turning to private creditors, who now hold ???61% of their external public debt, up across all regions since 2010. These private debts come with significantly higher costs - developing regions are paying interest rates 2-4 times higher than the U.S. and 6-12 times higher than Germany. In 2022, this led to a net negative transfer of ?? $49 billion from developing countries to external creditors.
Case Study: INDIA
India's Debt Dilemma: A $2.9 Trillion Threat to Global Growth
India, an economic powerhouse, faces a hidden threat – a flabbergasting $2.9 trillion debt, fueled by the pandemic and government stimulus, pushing its ???debt-to-GDP ratio to 90%, up from a pre-pandemic 74%.
With ???23% of government revenue?consumed by interest payments, vital investments in growth-enhancing initiatives are at risk. This hinders India's progress and could ripple through the global economy, considering its status as a major emerging market.
Though IMF has flagged this debt, the silver lining here is that most of ?????India's debt is domestically owned, and longer debt maturities offer some protection from interest rate spikes. Additionally, India's ???strong growth potential could help manage the debt burden in the long run.
Servicing this debt is diverting an ever-larger share of scarce government revenues away from crucial investments in human capital and development like health, education, and climate resilience.
If G7 allocated 2.9% of its combined annual military spending of $35.7 billion, it could rescue the Global South from its debt crisis, but also end world hunger.
Why did all these countries raise debt?
Countries have taken on debt for various reasons, from funding wars and infrastructure to stimulating growth and managing crises. In recent years, historically low interest rates have encouraged borrowing, with governments, businesses, and individuals ???taking advantage of cheap credit. The COVID-19 pandemic further fueled this trend, as countries borrowed heavily to finance healthcare, support businesses, and provide relief to citizens, with ???global debt surging by a record 28 percentage points in 2020 alone to reach 256% of GDP.
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However, this debt-fueled growth has come at a cost, creating a fragile economic landscape vulnerable to shocks.
Case Study: SRI LANKA
Debt servicing costs consumed a staggering 39% of the national budget in 2021, exceeding the combined spending on education, health, water, and sanitation.
Economic impact of global debts
Over half of developing countries are now allocating at least 8% of government revenues to interest payments, double the level from a decade ago. Some 54 countries, nearly half in Africa, are spending over 10% of their revenues on interest.
As a result, 3.3 billion people live in countries spending more on debt service than on education or health.
Why no one is talking about it?
Despite its severity, the global debt crisis has not received the attention it deserves. This is partly because the consequences have been ???masked by the prolonged period of low interest rates and the coordinated efforts of ???central banks to maintain financial stability. Governments and institutions have been able to service their debts and kick the can down the road. However, with interest rates now rising and global growth slowing, the risk of a debt crisis is becoming more apparent.
The IMF and World Bank estimate that 60% of low-income countries are already in or near debt distress.
In Focus: The Global Debt-To-GDP Ratios
While global debt-to-GDP ratios have ???declined from their pandemic peaks, the pace of improvement is slowing, and debt remains near record levels in absolute terms. Emerging markets are of particular concern, with debt-to-GDP ratios hitting a new high of 255% in 2023.
???? China, which accounts for a growing share of global debt, saw its total debt burden rise to 272% of GDP, 25 percentage points higher than before the pandemic.
Case Study: AFRICA
Africa is particularly at risk. The median public debt-to-GDP ratio in the region continues to climb, reaching 61.9% in 2023. Nearly half of African countries now have debt-to-GDP ratios exceeding 60%, compared to just a quarter in 2013.
Corporate debt vulnerabilities are also growing. Over $620 billion in debt from 'A' rated global corporates, largely Chinese firms, is at ???risk of downgrade to 'BBB'.
The amount of debt at risk of falling to high-yield status exceeds potential rising stars by a factor of 7-to-1, warning of the downside risks.
Built on a House of Cards: Why should investors care?
In this interconnected world, no country or investor is immune to the fallout.
Investors should be extremely concerned about the global debt situation, as it has created a fragile economic landscape that is vulnerable to shocks. The high levels of debt across households, businesses, and governments mean that ???any disruption to income or revenue streams could trigger a wave of defaults.
This is particularly worrisome for emerging markets, where external debt ???levels have grown by over 15% compared to pre-pandemic levels, pushing up debt servicing costs. A default by a major economy or a series of defaults across emerging markets could send shockwaves through the global financial system, leading to a credit crunch and a global recession. The stresses are particularly acute in the developing world, where the ???debt burden is increasingly unsustainable and is crowding out essential investments in human capital and resilience.?
According to World Bank data, the average duration of a public debt crisis is 13 years, with output losses averaging 26% of GDP.
In a worst-case scenario, a global debt crisis could plunge millions into poverty and set back development gains by decades.
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What to expect in the future?
Looking ahead, the global debt crisis is likely to worsen before it gets better. With ???global growth slowing and ???interest rates rising, the debt burden will become increasingly unsustainable for many countries and entities. Governments will face ???tough choices between servicing their debts and funding essential services and investments. Businesses will struggle with ???higher borrowing costs and weakening demand. Households will feel the squeeze of rising interest payments and stagnant incomes.
Pay attention to the triggers
In this context, a "black swan" event in the form of a major debt crisis is not just possible, but increasingly likely. Such an event could be triggered by a variety of factors, from geopolitical tensions and trade wars to natural disasters and pandemics. Once started, ??? a debt crisis can quickly spiral out of control, as defaults spread through the interconnected global financial system.
Ultimately, addressing the global debt crisis will require a fundamental shift in our economic thinking and practices. We need to move away from a model of debt-fueled growth and consumption towards one based on sustainable investment, inclusive development, and shared prosperity. This will not be easy, but the alternative - a devastating global debt crisis - is far worse. The time to act is now, before the "black swan" becomes a reality.
Summary