INTHEBLACK October 2021 - Magazine - Page 35
STORY GARY ANDERS
DEBT
THREAT?
T H E R E L E N T L E S S S P R E A D O F C O V I D - 1 9 H AS T R I G G E R E D
W H AT I S E F F E C T I V E LY T H E B I G G E S T G L O B A L D E B T B I N G E
I N H I S T O RY, S PA R K I N G C O N C E R N S A B O U T T H E E F F E C T S
O F D E B T O N O U R L O N G -T E R M E C O N O M I C F U T U R E .
F
aced with the unprecedented economic chaos
caused by population lockdowns, massive job losses
and plunging consumer spending, governments
and businesses last year borrowed close to
US$19.5 trillion (A$26.4 trillion), according to the
Washington-based Institute of International Finance (IIF).
The borrowing spree took the world’s total debt to more
than US$281 trillion (A$382 trillion) by the end of 2020.
By midway through 2021, total world debt had edged
back slightly from the peak, but IIF data shows it is still
above US$280 trillion (A$375 trillion). With no end
in sight to the pandemic, the debt is set to remain at
elevated levels for the foreseeable future.
Combined with a general rise in household debt
levels, global debt is at a record high and represents
more than 355 per cent of world gross domestic product.
Is high debt a problem? In its Global Financial
Stability Report, April 2021, the International
Monetary Fund (IMF) warns of “a pressing need
to act to avoid a legacy of vulnerabilities”.
In particular, the IMF says national policymakers
should be taking early action, including tightening
macroprudential policy settings, while at the same time
avoiding any broad restrictions to financial conditions.
“They should also support balance sheet repair to foster
a sustainable and inclusive recovery,” states the report.
The IMF notes that, if not “urgently addressed”,
financial vulnerabilities could evolve into new structural
legacy problems weighing on growth or, worse, testing the
resilience of the global financial system down the road.
“The global corporate sector has been hit hard
by the pandemic. Extraordinary policy support
has helped mitigate its impact. But the build-up
in corporate leverage resulting from easy financial
conditions poses a dilemma for policymakers.”
Taking advantage of record low interest rates,
companies around the world have been going to
banks to borrow additional capital.
Others have been raising funds from investors
through corporate bond issues.
During 2020, corporate bond issuers tapped
into buoyant credit markets, issuing a record
US$4.4 trillion (A$6 trillion) in investmentgrade and lower-rated bonds.
Central banks led the debt charge through 2020,
embarking on huge bond repurchase programs
aimed at helping their respective governments
fund financial rescue packages in order to stimulate
economic growth.
Those spending programs are continuing,
although they are likely to slow gradually during
the course of 2021 as COVID-19 vaccine rollouts
enable governments to reduce financial support
to businesses and individuals and to reopen their
economies.
After already completing A$200 billion of
Australian Government securities purchases, the
Reserve Bank of Australia announced in July this year
that it would be buying A$4 billion of government
bonds every week until at least 11 November.
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