Editorial | World looks to China and US to turn back tidal wave of debt
- Two largest economies need to put their own houses in order to save themselves and the global economy from ruinous consequences down the road
Global debt has expanded at an unprecedented pace this year as a result of the Covid-19 pandemic. China and the United States are the biggest contributors to the rapid debt accumulation respectively among emerging markets and developed economies.
Their heavy exposure needs to be addressed if the so-called debt tsunami doesn’t overwhelm the world economy, especially for developing countries that have proved to be the most vulnerable.
According to a new analysis by the Institute of International Finance, which represents worldwide financial institutions, the total level of global indebtedness will reach a whopping US$277 trillion by the end of this year.
This will represent 365 per cent of global gross domestic product, an alarming surge from 320 per cent from a year ago. Debt burdens are especially onerous for emerging markets.
Since the start of the pandemic, major central banks led by the US Federal Reserve have cut interest rates towards zero and pumped monetary stimulus into the world economy.
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Meanwhile, the collapse in tax revenues has made emerging market debt especially hard to service. As the cost of borrowing drops, companies and governments are borrowing to tide them over the crisis. That tidal wave of liquidity and tsunami of debt is what the institute is warning against.