Global debt at $300 trillion, or 350% of GDP

The global debt-to-GDP ratio is edging back up, approaching 350% of GDP in Q2 of 2022, after four quarters of consecutive decline.

That’s according to the latest Global Debt Monitor from the Washington-based Institute of International Finance (IIF).

“We expect the global debt ratio to reach 352% of GDP by end-2022 …” said the IIF.

However, in US dollar terms, global debt declined by $5.5 trillion to $300 trillion in Q2, due largely to the sharp depreciation in G10 currencies against the USD this year.

The IIF said that as more than a decade of cheap borrowing costs comes to an end, corporate bankruptcies are set to increase.

It said many companies are already struggling to service debt.

Further, rising funding costs are constraining the ability and appetite of many emerging market sovereign borrowers to tap international markets.

The The IIF said higher food and energy prices are exacerbating existing debt vulnerabilities across many developing countries.

Following a rise of over $2.5 trillion in Q1 of 2022, global debt levels dropped by $5.5 trillion to $300 trillion in Q2 of 2022 — the first quarterly drop since Q3 of 2018.

“While much of this is a valuation effect (as other G10 currencies slumped over 12% against the USD this year), a rapid slowdown in debt issuance has also contributed …” said the IIF.

“Overall, debt in mature markets declined by $4.9 trillion to some $201 trillion in Q2 2022.

“The U.S. and Canada were the only countries to see a rise in debt levels.

“During the same period, the decline in debt levels across emerging markets was much smaller at around $0.6 trillion, bringing total EM debt down to around $99 trillion …

“With higher rates still disrupting the borrowing plans of many businesses and consumers, concerns over a rapid slowdown in growth (particularly in China and Europe) — and rising social tensions due to higher energy and food prices — will likely prompt more borrowing by governments (and state-owned enterprises) to cushion the impact of the economic slowdown.

“We expect the global debt-to-GDP ratio to reach 352% of GDP by the end of 2022 …

“The rapid rise in borrowing costs and weak investor appetite have kept many issuers away from primary markets this year.

“Issuance in syndicated loan markets has substantially weakened, while non-financial corporate long-term bond issuance has sunk to its slowest pace since 2014.

“Over the first 8 months of 2022, the pace of government bond issuance was some 20% below the same period in 2021.

“Adjusted for inflation, global bond issuance volumes are now at multi-year low …

“This weakness has also been evident in ESG debt markets with total issuance remaining well below the figures seen last year …

“With the era of cheap borrowing costs coming to an end, many companies are already struggling to service debt.

“Over the last decade, low interest rates gave many smaller, less successful firms a life-line through cheap debt financing.

“The rise in the number of so-called zombie firms have been particularly notable in the U.S. and China in recent years … and is reflected in a parallel decline in the number of bankruptcies since the onset off the COVID crisis.

“Looking ahead, a significant increase in bankruptcies may well be on the cards as borrowing costs rise, which will make it quite challenging for central banks to engineer a soft landing without adverse implications for job markets.

“However, this expected rise in bankruptcies will probably not prolong the growth slowdown (or recession), given that corporate restructuring regimes are generally much more efficient than those for individuals and sovereigns …”