The level of global debt is reaching crisis point, according to analysis from S&P Global Ratings, with debt issuance leading to lower levels of productivity and rising rates pinching fixed income as an asset class.
A new paper written by Alexandra Dimitrijevic, global head of research & development, and Terry Chan, senior research fellow for credit research & insights at S&P Global Ratings has highlighted that there is no easy way to move from a position of record leverage and higher interest rates.
They note that global debt hit a record $300 trillion – 349% leverage on gross domestic product – which translates to $37,500 of average debt for each person in the world versus GDP per capita of just $12,000.
Over the last fifteen years, government debt-to-GDP leverage grew by 76%, to a total of 102% from 2007 to 2022. Meanwhile Federal Reserve funds and European Central Bank rates were up an average of three percentage points in 2022.
“Assuming 35% of debt is floating rate, this means $3 trillion more in interest expenses, or US$380 per capita,” they noted.
The risk is a ‘Great Reset’.
“There is no easy way to keep global leverage down,” they write. “Trade-offs include more cautious lending, reduced overspending, restructuring low-performing enterprises and writing down less-productive debt. This will require a ‘Great Reset’ of policymaker mindset and community acceptance.”
