December 4, 2022

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The world’s debt is never too high, a bomb ready to explode

the question religion It’s hotter globally than ever: too much Indebtedness of countries and companiesA bomb will explode in the world?

The question is legitimate if we take into account the extent to which the financial situation has changed since the pandemic, with central banks rushing to change the course of monetary policy: from negative rates to the sharply increasing cost of financing, what does this mean for corporate treasuries and with force. city ​​governments?

The situation is grave, as a study of the situation by S&P Global Ratings shows debt in the world: Because this bomb can explode.

World debt record

The report is clear in its framing of the emergency: “Resolving the debt overhang, amid slowing growth and rising interest rates, can be painful, as governments are forced to cut spending and borrowers default.”

This is how the global rating agency Standard & Poor’s summed up the global debt situation. specifically in numbers, Global financial debt is at an all-time high of 349% on a global debt-to-GDP basis, up more than 25% from 278% in the pre-2008 financial crisis era..

Looking at public administrations, households, financial institutions, and non-financial corporations, we have reached the peak of debt 349% In June 2022. In particular, thegovernment borrowing significantly since 2007, up three-quarters, to 102%.

The S&P chart highlighted the sudden rise in debt levels of countries (government), households (households), banks (financial firms), and private firms (non-financial firms):

Faced with these percentages, Standard & Poor’s credit ratings agency expects very difficult times especially for corporate borrowers and some governments, now burdened with debt contracted in better times than these and the times after.

Countries in the Balance: From Debt to Default?

S&P Global focused on the case State debt. One of the main pillars to explain higher levels of debt was i interest rates extremely low by central banks in recent years.

This has allowed many sovereign states, most of them with low ratings, to access the capital markets for the first time. However, recent sharp increases in interest rates Global is now a big challenge. The weighted average interest burden has risen to nearly 8% of government revenue.

The situation has worsened for countries with foreign currency debt. at recent days Sri Lankan default It is an example of that.

with the elderly central banks As interest rates continue to rise, S&P expects more defaults or government debt restructurings in the next 12 to 18 months.

Not only that, the new dynamic of financing costs now under way poses challenges for even the highest rated Sovereigns, who have to struggle to maintain current ratings of their financial stability. Recent negative forecasts we attribute to ratings United kingdom is an example of that.”Standard & Poor’s recalled.

Finally, pay attention to what could happen in 2023 Debt bomb The state can explode in different ways. According to S&P:

The main challenge for the sector is its deterioration Geopolitical tensions. This continues to feedinflation And raising interest rates increases pressure on weak financial positions, while at the same time increasing conditions of political polarization, social tensions, and the potential for sudden, destabilizing events.”

These dynamics cannot be mitigated simply by public order measures, and for this reason, they present both significant and insignificant threats.

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High-debt companies: China’s wake-up call

In the corporate debt sector, the spotlight is on China.

According to the S&P report, in the decade through June 2022, “Global leverage for non-financial firms, measured by the debt-to-GDP ratio, increased by 17%. This was mainly driven by the 20% growth in corporate debt in China and in emerging markets.

The Chinese question is not trivial and deserves attention: its corporate debt will reach $ 27 trillion in June 2022, representing 31% of International corporate debt. Both developed and emerging markets have seen increased leverage during Covid. But, unlike almost all other economies, Chinese corporate debt hasn’t fallen much in the recovery year of 2021, in fact it’s been increasing.

in 2023 debt terms So companies can go wrong. Recession risks, increasing margin pressures due to expensive inputs and weak demand, central banks tightening monetary conditions, the Russia-Ukraine conflict, and the China-US trade war all point to tough times.