NAlready Is the world economy so indebted? Global debt reserves rose from $ 83trn in 2000 to about 5 295trn in 2021 প্রায় almost twice the speed of the world. GDP Debt has increased from 230% GDP On the eve of the 2000 to 320% epidemic, the Covid-19 took it to an even higher 355% last year.
Part of the reason for this explosion is the steady decline in borrowing costs over the past two decades. A ten-year treasury yielded 6.5% yield in early 2000. Today it pays 1.8%. The Federal Reserve’s effective policy rate fell to about 0.08% from 6.5% at that time. Eurozone and benchmark rate sub-zero in Japan. The decline in government-bond yields and the central bank’s policy rate has been fed by the rate of borrowing for private borrowers.
As a result, although global debt has increased year after year, the cost of world interest, as a share GDP, Well below their peak in the 1980s. In America, for example, they stand at 12%. GDP In 2021, compared to 27% in 1989.
All of this may change soon. The era of super-cheap money is coming to an end. Central banks are struggling with rising inflation. In some emerging economies that have already raised interest rates for some time: Brazil’s central bank raised interest rates by 1.5 percentage points after a meeting on February 2, its third consecutive rise. At the time of writing, the Bank of England was expecting its second interest rate hike The central bank-Fed has signaled that it will likely raise rates as early as March, with the biggest impact on global capital flows, and investors expect four more quarter-percentage-point increases this year. The actual cost of borrowing for governments, although still negative in many places, is rising by an inch. Five-year Treasury inflation-protected security yield in the US (Advice), Which for most of 2021 was close to -1.7%, now stands at -1.2%.
The scale of the global interest bill is huge. Economist Estimates that global households, companies, financial institutions and governments have paid $ 10.2trn interest in 2021, equivalent to 12% GDP. As a guide to the potential impact of the forthcoming rate hike, we consider a scenario where interest rates faced by firms, families and governments in 58 countries will increase by one percentage point over the next three years. (By comparison, five-year Treasury yields have risen percentage points since the spring of 2021.)
Our estimates are that global interest bills will exceed $ 16trn by 2026, equivalent to an estimated 15%. GDP In that year and if rates rise twice as fast, say because inflation continues and central banks are forced to take drastic measures, the interest bill could be around t 20trn by 2026, which is about one-fifth of the world. GDP.
Finding out the effect of rate hikes on interest bills is not easy. Some loans are tied to a fixed interest rate, for example, higher borrowing costs are passed only when it is rolled out. The average maturity of government debt, for example, is five years. The companies borrow for a period of two years; The family usually borrows for a long time. Income changes over time, affecting borrowers’ ability to repay the loan.
Borrowers can repay the loan at a higher interest rate, thus reducing their interest-bearing costs. But overall, according to research by the Bank for International Settlements (Until), A club in the central bank, increases total debt repayment (i.e., including interest and capital) compared to higher interest rates. The higher the level of debt, the greater the pressure, indicating that the economy has simply become more sensitive to rate hikes.
Our calculations estimate that interest rates have risen on government and family debt within five years and on company debt for more than two years. We assume that is consistent with nominal income IMFIts forecast. Since the fund’s estimates assume that public debt is growing at the same rate, we need toGDP The proportions remain flat. This refers to a budget deficit of about 5% per annum GDP– Narrow compared to the years before the epidemic.
Picking up the tab
The burden of high interest will not fall equally on all borrowers. In a country, private sector borrowers receive a much larger share of the bill than the government, which can borrow more cheaply, for example. Financial institutions and savers, such as wealthy families, take interest payments as well. The more open the borrower is, the higher the rate of debt, the higher the interest bill, and the more likely they are to reduce the cost of paying off their higher debt, or, more extremely, the more they fall into distress. This will have an impact on economic activity.
To see which borrowers may be more sensitive to interest rate hikes, we rank the domestic, corporate and public sectors for our country in two dimensions (for this practice we exclude the financial sector, which is in the middle of debt). The first measure is the debt-to-income ratio, which measures how much debt is affordable. The second is the change in ratios over the past decade, which captures how much interest rate exposure has increased over time. We then create an overall ranking for each sector of each country (see chart).
Start with the government. Lebanon, which has already defaulted on some of its debts since the onset of the epidemic, tops the list with a high debt-to-revenue ratio that has rocketed over the past decade. Despite being a major exporter of oil, the Nigerian government’s revenue only covers its interest costs. Fortunately, most of the borrowing by emerging market governments during the epidemic was in their own currency, a group of bankers, Emre Tifftik of the Institute of International Finance, noted, could make them less exposed to flying foreign capital.
The next set of our borrowers belongs to the family. South Korea, Norway and Switzerland are among the countries with the highest debt to income ratio in our country group. Mortgages in Sweden are huge. Home prices have risen 11% in 2021 and more than half of mortgage loans have been made with variable interest rates. When the rate increases, therefore, mortgage bills follow ৷ Debt-to-income ratios have more than doubled in China and Russia.
Companies are the third set of borrowers. France and Switzerland have the highest debt as a fraction of gross operating profit, with their rates rising. Among emerging markets, Chinese and Russian companies are also under pressure from their bills. Overall, our searches for the private sector are largely consistent with Credit-Two, the primary indicator of financial stress.GDP The gap, calculated by Until, Which measures the level of borrowing beyond its long-term trend Based on these measurements, the private sector in Switzerland and South Korea ranks among the five most expanding in the world.
Helps our rankings determine who is most exposed to rising interest rates. But they can’t predict which sector or economy will suffer as a result of rising interest rates. This is a more complex picture, depending on the prospects for economic growth and the response of policymakers, among other things. Strain in one part of the economy can interact with other parts, say weakening the banking system.
Although families in rich countries are heavily indebted, historically the interest rates they face are lower. In contrast, the level of debt in Argentina may not seem particularly high, but the 35% interest rate for the private sector, which brings tears to the eyes, means that borrowers are under intense pressure. Poor countries that have the potential to grow can fight. Rapid rate hikes in the U.S. could hamper their recovery, says Jean Frieda Off Pimco, A bond-fund manager. Income cannot be increased rapidly to meet the cost of interest.
China faces a combination of threats: the property market has collapsed in Evergrand, a large and heavily indebted developer, has revealed. Banks are plagued by bad household loans. But the country’s policymakers have also responded to these risks. Tensions over economic growth have probably helped explain why the People’s Bank of China has cut interest rates, not raised them.
Policymakers in other parts of the world may be moving in the opposite direction, but the potential for heavily indebted borrowers to pull back the economic recovery will be weighed on their minds. 3
Amendment (February 2): Total interest bill figure modified, $ 10.5trn to $ 10.2trn, equivalent to 12% of GDP. We also edited the text in places to make it clear that our ranking shows exposure to different borrowers’ interest rates, rather than weaknesses. Sorry.
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This article is published under the title “The Bill Balloon” in the Finance and Economics section of the print edition.