## Dangerous Global Debt Burden Requires Decisive Cooperation _IMF Blog, April 11, 2022_ ## Source details **Canonical URL:** [Dangerous Global Debt Burden Requires Decisive Cooperation](https://www.imf.org/en/blogs/articles/2022/04/11/blog041122-dangerous-global-debt-burden-requires-decisive-cooperation) ## Other formats - [Markdown version](/en/blogs/articles/2022/04/11/blog041122-dangerous-global-debt-burden-requires-decisive-cooperation/index.md) - [Structured JSON version](/en/blogs/articles/2022/04/11/blog041122-dangerous-global-debt-burden-requires-decisive-cooperation/index.json) - [Bundle manifest](/en/blogs/articles/2022/04/11/blog041122-dangerous-global-debt-burden-requires-decisive-cooperation/bundle-manifest.json) ## 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.* --- ## References - [https://www.imf.org/wp-content/uploads/2022/04/debt-chart-panel-final-01.png](https://www.imf.org/wp-content/uploads/2022/04/debt-chart-panel-final-01.png) - [can raise the cost of borrowing](https://www.imf.org/en/Publications/fandd/issues/2022/03/Steady-prices-sustainable-debt-Reis) - [complex coordination challenges](https://blogs.imf.org/2022/04/07/restructuring-debt-of-poorer-nations-requires-more-efficient-coordination/) _Source: https://www.imf.org/en/blogs/articles/2022/04/11/blog041122-dangerous-global-debt-burden-requires-decisive-cooperation_