The global debt accumulation grew by $8.3 trillion in the first quarter of 2023, to a record high near $305 trillion, as the global economy faced an “adjustment crisis” with rapid monetary policy tightening by central banks, according to a recent report from the Institute of International Finance. IIF”.
The Financial Industry Authority said the combination of high debt levels and high interest rates had made it more expensive to service that debt, raising concerns about leverage in the financial system.
Central banks around the world have been raising interest rates for over a year in an effort to rein in soaring inflation. Earlier this month, the US Federal Reserve raised the federal funds rate to a target range of 5% to 5.25%, the highest level since August 2007, according to CNBC, which was seen by Al Arabiya.net. .
The IIF said: “With financial conditions at their most constrained since the 2008-2009 financial crisis, the credit crunch will lead to higher default rates and lead to more ‘non-performing companies’ – already approaching 14% of companies listed in the IIF. United States,” according to the IIF in its quarterly Global Debt Monitor.
The sharp increase in the global debt burden in the three months to the end of March marked a second consecutive quarterly increase, following two quarters of sharp declines during the last year’s period of monetary tightening. Non-financial corporations and the government sector led much of the recovery.
The report said: “At nearly $305 trillion, global debt is now $45 trillion higher than its pre-pandemic level, and is expected to continue to increase rapidly: despite concerns about a potential credit crunch in the wake of recent turmoil in the banking sectors In the US and Switzerland, the government still needs to tighten borrowing to higher levels.”
The institute noted that an aging population, rising healthcare costs and large gaps in climate finance were putting pressure on government balance sheets. Spending on national defense is expected to rise in the medium term due to heightened geopolitical tensions, which are likely to affect the credit standing of both governments and corporate borrowers, according to forecasts from the Institute of International Finance.
“If this trend continues, it will have major repercussions for international debt markets, especially if interest rates remain high for a longer period,” the institute said.
Total debt in emerging markets hit a new record of more than $100 trillion, about 250% of GDP, up from $75 trillion in 2019. China, Mexico, Brazil, India and Turkey were the biggest contributors to the rise.
In developed markets, Japan, the United States, France and the United Kingdom posted the largest increases for the quarter.
Banking disruptions and the “adjustment crisis”
The rapid tightening of monetary policy exposed the fragile liquidity positions of a number of small and medium-sized banks in the United States, and led to a series of collapses and bailouts in recent months. The ensuing market panic eventually spread to Europe and forced the emergency sale of Swiss giant Credit Suisse to rival UBS.
The Institute of International Finance suggested that companies had gone through a “crisis of adjustment” to what it called the “new monetary order”.
He said that although recent bank failures seem more private than systemic – and that US financial institutions carry much less debt (78% of GDP) than they did in the run-up to the 2007/2008 crisis (110% in 2006) – Fear of contagion has led to a surge in deposit withdrawals from US regional banks.
“Given the central role of regional banks in credit intermediation in the US, concerns about their liquidity positions could lead to a sharp contraction in lending to some sectors, including households and firms with weak banks.”
The Institute of International Finance said this downturn in credit terms could particularly affect small businesses, along with causing higher rates of default and more “corporate zombies across the board”.
The term “zombie” corporations – or zombie corporations in the sense of Hollywood screenwriters – refers to corporations with sufficient profits to allow them to continue operating and pay interest on their debts, but not to repay the debt, meaning that any cash generated is immediately spent on the debt. .
The report estimated that about 14 percent of American companies can be considered “zombies,” with a significant portion in the healthcare and information technology sectors.