Global debt balloons to record $307 trillion; debt ratios go through roof

Despite increasing interest rates curbing bank credit, global debt surged to a historic high of $307 trillion in the second quarter of this year, with leading contributors being countries like the United States and Japan, a report from the Institute of International Finance (IIF) revealed Tuesday.

The financial services trade group's report revealed that global debt denominated in dollars had grown by $10 trillion in the first half of 2023 and had risen by a staggering $100 trillion over the past decade. 

This latest upswing has elevated the global debt-to-GDP ratio for a second consecutive quarter to 336%. Prior to 2023, this ratio had been on a declining trend for seven quarters.

The report attributed the increase in the debt ratio to slower economic growth and a deceleration in price inflation.

"The sudden rise in inflation was the main factor behind the sharp decline in debt ratio over the past two years," the IIF said, adding that with wage and price pressures moderating, even if not to their targets, they expect the debt to output ratio to surpass 337% by year-end.

More than 80% of the latest debt build-up had come from the developed world with the US, Japan, Britain and France registering the largest increases. Among emerging markets, the biggest rises came from the largest economies, namely China, India, and Brazil.

"As higher rates and higher debt levels push government interest expenses higher, domestic debt strains are set to increase," the IIF said.

The report found that household debt-to-GDP in emerging markets was still above pre-COVID-19 levels, largely due to China, Korea and Thailand. However, the same ratio in mature markets has dropped to its lowest level in two decades in the first six months of the year.

"Should inflationary pressures persist in mature markets, the health of household balance sheets, particularly in the US, would provide a cushion..against further rate hikes," it said.

Markets are not pricing in a US Federal Reserve rate hike in the near future, but the target rate of between 5.25% and 5.5% is currently expected to remain in place until at least May of next year, according to the CME FedWatch tool.

Rates are expected to remain high for a long period in the United States, which could pressure emerging markets as needed investment is funnelled to the less-risky developed world.

The Fed is expected to leave rates unchanged at the end of its meeting on Wednesday, but could signal that it is open to further rate hikes.