According to a report released on Tuesday by the Institute of International Finance, the world's total debt soared by $10 trillion in the first half of 2023, setting a new all-time high at $307 trillion.
The substantial increase in the global debt load is primarily attributed to the prevailing high-interest rate environment across most economies, surpassing the debt level by a staggering $100 trillion compared to a decade ago.
The report indicates that the global debt-to-GDP ratio now stands at approximately 336%, up from 334% in the fourth quarter of 2022. This ratio had experienced seven consecutive quarters of decline before resuming its upward trend in the first half of 2023.
The primary factors contributing to the decline in the debt ratio were worldwide spikes in inflation, driven by higher borrowing costs and stricter lending standards.
The lion's share of the debt accumulation in the first half of the year was attributed to mature markets, including the United States, the United Kingdom, Japan, and France, accounting for more than 80% of the increase. In contrast, emerging markets like China, India, and Brazil witnessed the most significant surge in debt.
The Institute of International Finance highlighted the "alarming levels" of domestic government debt in many emerging market nations, emphasizing that the global financial system is inadequately prepared to manage this situation. The report proposed implementing a market-based framework to address unsustainable domestic debt levels, which could support initiatives aimed at mobilizing resources for development financing, including climate finance.
Consumer debt in mature markets, however, remains "largely manageable," with the household debt ratio reaching its lowest point in two decades during the first half of 2023. This provides room for central banks to tighten policies further, especially if inflation remains elevated, according to the financial industry body.
The report suggests that the health of household balance sheets, particularly in the United States, could act as a buffer against additional interest rate hikes.
This report precedes the Federal Reserve's upcoming interest rate decision, scheduled for later this Wednesday. Market consensus expects the U.S. central bank to refrain from raising its benchmark rate, with CME Group data indicating only a 1% likelihood of the Fed implementing its 12th rate hike since March 2022.
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