Dangerous Global Debt Burden Requires Decisive Cooperation
IMF Blog, April 11, 2022
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Bibliographic details
- Authors: Vitor Gaspar, Ceyla Pazarbasioglu
- Published: April 11, 2022
Overview
- Authors: Vitor Gaspar, Ceyla Pazarbasioglu
- Date: April 11, 2022
- Core message: With elevated sovereign debt risks amid the pandemic and the war in Ukraine, a global cooperative approach is necessary to reach orderly resolutions of debt problems and prevent defaults.
- Context: Pandemic-related fiscal support stabilized financial markets and supported recovery but increased public and private borrowing to unprecedented levels; the war in Ukraine adds further fiscal strain.
Record debt
- During the pandemic, deficits increased and debt accumulated much faster than in early years of other recessions, comparable only to the two 20th century world wars.
- Key statistics:
- Borrowing jumped by 28 percentage points to 256 percent of gross domestic product in 2020.
- Government accounted for about half of this increase; the remainder came from non-financial corporations and households.
- Public debt now represents close to 40 percent of the global total, the most in almost six decades.
- Emerging market and developing countries (excluding China) accounted for a relatively small share of the increase.
- About 60 percent of low-income countries are now in, or at risk of, distress.
Risks from rising inflation and tightening financial conditions
- Two elements had previously kept debt service costs low:
- Nominal interest rates were very low, close to zero or even negative along the yield curve in countries such as Germany, Japan and Switzerland.
- Neutral real interest rates were on a significant downward trend in many economies, including the United States, the euro area, and Japan, as well as a number of emerging markets.
- Changing dynamics:
- Real interest rates below real growth rates contributed to a perception of painless fiscal expansion, but heightened risk perception and expected monetary policy tightening have brought debt vulnerabilities back into focus.
- Persistent inflation—and inflation volatility—ultimately can raise the cost of borrowing; this can happen quickly in countries with short debt maturities.
- Projections and impacts:
- In advanced economies, economic activity, the primary balance, spending, and revenues are projected to return close to pre-pandemic projections by 2024.
- Emerging and low-income economies face persistent GDP and revenue losses, implying primary spending will be persistently lower and progress toward the Sustainable Development Goals will be pushed back.
- Distributional vulnerabilities:
- Sharp increases in energy and food prices add pressure on the poorest and most vulnerable.
- Food accounts for up to 60 percent of household consumption in low-income countries.
- Low-income countries that rely on imported fuel and food may require more grants and highly concessional financing.
- Additional pressures:
- Global financial conditions are tightening as major central banks raise interest rates to contain inflation.
- In most emerging markets, sovereign spreads are already above pre-pandemic levels.
- The credit crunch is exacerbated by declining overseas lending originating from China, driven by solvency concerns in the real-estate sector; expanding lockdowns in Shanghai and other major cities; the transition to a new growth model; and problems associated with existing loans to developing countries.
A global cooperative approach
- Debt restructurings are likely to become more frequent and will involve more complex coordination challenges because of increased creditor diversity.
- Having mechanisms in place for orderly restructuring is in the best interest of creditors and debtors alike.
- Recent initiatives and gaps:
- For low-income countries, the Debt Service Suspension Initiative expired at the end of 2021.
- The Group of Twenty’s Common Framework for Debt Treatments beyond the DSSI has yet to deliver; improvements are needed.
- Options should be explored to help a broader range of emerging and developing economies that are not eligible for the Common Framework but would likely benefit from a globally cooperative approach.
- Risks of inaction:
- Muddling through will amplify costs and risks to debtors, creditors and global stability and prosperity.
- The impact will be most sharply felt by households that can least afford it.
Policy recommendations and IMF role
- Strengthen debt transparency and debt management policies and frameworks through governance reforms to reduce risks.
- Undertake reforms to improve debt transparency and strengthen debt management policies and frameworks.
- Provide granular policy advice and capacity-building activities to address root causes of unsafe debt.
- Where liquidity support alone is not enough, policymakers need to take a cooperative approach to:
- Ease the debt burdens of the most vulnerable countries.
- Foster greater debt sustainability.
- Balance the interests of debtors and creditors in a balanced way.
- Mobilize more grants and highly concessional financing for low-income countries dependent on imported fuel and food.
IMF blog post: Dangerous Global Debt Burden Requires Decisive Cooperation — Vitor Gaspar, Ceyla Pazarbasioglu, April 11, 2022.
