Can rising global debt cause a global financial crisis?
As a result of the pandemic, global debt has reached a record high, and continues to rise further. This situation makes the market volatile and investors have to be extremely cautious. Many fear that a global financial crisis is just around the corner.
It should be understood that debt is a normal process in the development of the modern economy. They reduce the cyclicality for business and promote growth. But over the past 10 years there has been an imbalance in the market: the debt has been growing faster than the GDP. The situation was further aggravated by the pandemic, as a result of which central banks were forced to revise their monetary policies, resulting in even greater debt growth. Analyst at Finam Sergey Perekhod shared his view on the risk of a new financial crisis.
According to him, economists announced about the rapid increase in the debt burden back in 2019, but 2020 made its adjustments, the impact of which no one could foresee. According to information from the Institute of International Finance, the implementation of measures to support the economy as a result of the pandemic contributed to an increase in global debt by 24 trillion dollars. By comparison, there was a $10 trillion increase in 2019. As a result, the size of the debt amounted to a record $ 281 trillion, and the ratio of the index to global GDP became 355%, the dynamics of growth was at 35 p.p. These results are higher than those seen in 2008 and 2009. Debt growth rates especially increased in the European Union; in Spain, France and Greece the ratio grew by about 50 p.p.About 50% of the increase came from governments, non-financial companies increased their debt by $5.4 trillion, households by $2.6 trillion, and banks by nearly $4 trillion.
The size of public debt increased significantly in India, the United Kingdom, South Africa and Canada.
Usually in the current phase of the cycle the market has shown a credit squeeze, but not this time. In this case, the growth of bonds with negative yields played a big role, their volume amounted to about $14 trillion. Now about 20% of the total number of high-yield bonds have negative yields.
According to the analyst, one of the options to slow the growth of government debt is to increase the size of rates. But for now, such a decision could lead to massive sales of low-yielding bonds, which would cause the market to collapse. Therefore, for the time being, lending at negative real rates should be continued, and rates should gradually be set at a neutral rate, gradually increasing. In addition, overheated markets should be controlled, especially in China and the European Union.