Record $226 Trillion Global Debt at Risk as Rates Rise, IMF Says

(Bloomberg) -- Global debt surged to a record $226 trillion last year, raising concerns about its sustainability as interest rates rise, the International Monetary Fund said.

Faster-than-expected interest rate hikes could put pressure on heavily indebted nations and force governments and companies to cut back on debt and spending, hurting economic growth, IMF officials said in a report Wednesday.

Global debt climbed by 28 percentage points to 256% of gross domestic product in 2020, the largest one-year surge since World War II, they said, citing figures from the fund’s latest Global Debt Database.

As interest rates rise, fiscal policy is typically adjusted as governments spend more on servicing debt and cut back on expenditure in order to keep deficits under control. 

“The risks will be magnified if global interest rates rise faster than expected and growth falters,” the IMF officials, led by Vitor Gaspar, wrote. “If the public and private sectors are forced to deleverage simultaneously, growth prospects will suffer.”

Public debt soared in advanced economies last year as governments rolled out huge fiscal stimulus to cope with the Covid-19 pandemic. Emerging and low-income countries saw debt ratios surge because of a significant fall in nominal GDP, according to the researchers.

Borrowing by governments accounted for slightly more than half of the increase in global debt in 2020, with the global public debt ratio jumping to a record 99% of GDP, according to the report. China alone accounted for 26% of the global debt surge last year, it said.

Government debt in advanced economies surged to 124% of GDP in 2020 from just around 70% in 2007, according to IMF. Private debt in these economies, on the other hand, rose at a more moderate pace to 178% from 164% over the period, it said.

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With assistance from Bloomberg