Coronavirus pushes global debt to record high

The coronavirus crisis pushed global debt levels to a new high of over $272 trillion in the third quarter, the Institute for International Finance said, as it warned of the “attack of the debt tsunami.”

The institute said global debt would break new records in the coming months to reach $277 trillion by the end of the year. This would represent a debt-to-GDP ratio of 365%.

It comes after governments across the world stepped up support for companies and citizens in the face of a global pandemic, which led to widespread stay-at-home orders. Businesses also had to look for alternative funding as activity came to a halt in the wake of Covid-19. Both events translated into higher borrowing and, therefore, more indebtedness.

“Spurred by a sharp rise in government and corporate borrowing as the Covid-19 pandemic wears on, the global debt load increased by $15 trillion in the first three quarters of 2020 and now stands above $272 trillion,” the IIF said in its latest Global Debt Monitor, out on Wednesday.

Among advanced nations, debt surged above 432% of GDP in the third quarter — a 50 percentage points increase from 2019. The United States, which has implemented one of the biggest stimulus packages in the world, accounted for almost half of this rise.

In the eurozone, government action led to an increase of $1.5 trillion in public debt over the same period, to reach $53 trillion. This is still below the region’s all-time of $55 trillion seen in the second quarter of 2014 when the region was dealing with the sovereign debt crisis.

In emerging markets, debt levels rose to over 248% of GDP, with Lebanon, China, Malaysia, and Turkey experiencing the biggest rises in non-financial-sector debt.

However, the coronavirus pandemic is not the sole factor to blame for the massive level of global debt.

“The pace of global debt accumulation has been unprecedented since 2016, increasing by over $52 trillion,” the IIF said.

“While some $15 trillion of this surge has been recorded in 2020 amid the Covid-19 pandemic, the debt build-up over the past four years has far outstripped the $6 trillion rise over the previous four years.”

Larger debt levels put governments, companies and households at a higher risk during economic downturns as they are required to service that debt.

Real GDP growth 2020

Photo: IMF

Meanwhile, the US Treasury refuses to extend some of the Fed’s crisis-fighting tools.

The US Treasury decided not to extend several emergency lending facilities put in place by the Federal Reserve at the start of the coronavirus pandemic, prompting an expression of disappointment from the central bank, which warned that the economy remained ” tense and vulnerable.”

In a letter to Jay Powell, Fed Chairman, Treasury Secretary Steven Mnuchin on Thursday asked the central bank to return unused funds from five emergency programs before they expire at the end of December.

The facilities Mr. Mnuchin seeks to end include: two plans put in place to buy corporate debt; a facility created to lend to medium-sized businesses, known as the Main Street Lending Program; a loan program to state and local governments; and another to support asset-backed securities.

Mr. Mnuchin, however, asked Mr. Powell to extend for 90 days four emergency credit facilities that support short-term funding markets, including commercial paper and money market mutual funds.

Senior Fed officials have argued that an extension of lending facilities would ensure stability in financial markets at a time when the economic outlook is still fragile due to declining budget support and a push in cases of coronavirus.

“The Federal Reserve would prefer that all emergency facilities put in place during the coronavirus pandemic continue to play their important role as a safety net for our still stressed, and vulnerable country economy Fed said in a statement Thursday.

Many investors supported the fed, advocating the need to preserve emergency credit facilities as an insurance policy against deteriorating financial markets and warning of the danger of removing a crisis-fighting weapon from the arsenal of the Fed.

Mr Mnuchin said ending the emergency credit facilities would free up $ 455 billion in funds that could be spent by Congress on other things. Mr Mnuchin said that in the “unlikely event” that the facilities were to be re-installed, a new approval would have to be sought from the Treasury Department.

It is also positive for the US dollar, which is expected to rebound after the recent downturn. 

Investors may pay attention to the discussions surrounding these plans between the US Treasury and the Fed.