Rating agencies say the global economy is at very high risk as total debt reaches $300 trillion.
Many analysts predict that a recession awaits the global economy in 2023. Its main reason is the continuing growth of inflation. The duration and intensity of the recession will depend on the measures taken by the governments and central banks of countries. According to Standard and Poor’s, the world risks not only facing a recession, but also a major financial crisis as governments, households and financial institutions continue to accumulate debt.
World debt is 300 trillion
The rating agency warns that the accumulation of debt could lead to the fact that by 2030 the total amount of borrowed funds will reach 366% of global GDP. In turn, this will mean a sharp rise from the 349% level at which the global debt-to-GDP ratio was in June 2022, when the total debt around the world was $300 trillion.
The report of the rating agency, signed by Terry Chan and Alexandra Dimitrievich, notes that leverage is growing somewhat faster for developed economies than for developing ones. “Demand for debt – for example, to help consumers cope with inflation, mitigate climate change and rebuild infrastructure – will continue,” they write.
The US is the leader in debt
In September 2020, the national debt rose to $26.9 trillion. On October 4, 2022, America’s gross public debt topped $31 trillion for the first time, totaling $31.12 trillion. Of these, 6.82 trillion is US intragovernmental debt, another 24.29 trillion is public debt. At the same time, the authorities of the country are not particularly worried about this, since they have long shifted their debts to the holders of the famous currency – US dollars.
The US government is the largest indebted consumer, borrowing from creditors around the world to cover 43% of its spending this year. And this is Washington’s largest loan since World War II. But the US is unique: because of its sheer size, it cannot be considered a typical borrower. Take, for example, that if the United States defaults on its debt obligations (like Greece, for example), then such financial chaos may break out, compared with which the 2008 crisis will seem insignificant. Also, because the dollar has long been considered the reserve currency among global investors, Washington can always print more dollars to make sure it can pay its bills. No other borrower can afford this luxury.
“To reduce the risk of a financial crisis, a balance between spending and saving may be needed.” The increase in interest rates by central banks over the past year has led to an increase in the debt burden.
Global Banks at War
The Fed, ECB and other central banks around the world are raising interest rates to bring down record inflation. This race to bring inflation down, as well as other economic events, are causing Wall Street to fluctuate constantly. Subsequently, according to Forbes, the top five U.S. investment banks’ revenues declined by almost 50%, to about $19 billion in the last three quarters of 2022. The decline in mergers, acquisitions, deals and initial public offerings has led management to reconsider paying big bonuses.
As the tide began to turn, there were reports of younger employees working more hours without overtime, accompanied by pay increases. The heads of the largest investment banks have come to the conclusion that they will have to cut layoffs and bonuses to executives and shareholders. Citigroup and Barclays began a string of layoffs, shedding employees who allegedly couldn’t do their jobs. In September, JPMorgan announced that it would implement layoffs and cut bonuses by the end of the year.
How to overcome the crisis
Sustainability, optionality and the ability to make quick decisions are all vital. Resilience, or the ability to bounce back from setbacks, often depends on strong balances and integrity. Optionality, which allows for a change of course at little cost, is reinforced by openness that comes from diversity in terms of gender, race, culture, or experience. And the ability to respond quickly to changing circumstances depends on leadership and management to take bold steps in times of greater clarity.
For national governments and central banks, the goal should be to minimize accidents along the way and increase the chances that everyone ends up in a better place. The more households, companies and governments do not recognize and respond to the structural changes taking place in the global economic and financial system, the more difficult it will be to reduce the risks and seize the opportunities associated with these changes. The world is not just on the verge of another recession. It is in the process of profound economic and financial changes.