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Data from the Institute of International Finance show that in the first half of this year, the scale of world economic debt hit a new high, while borrowing as a share of gross domestic product rose again after nearly two years of decline.

The IIF said in its Global Debt Monitor report released on Tuesday that total debt, including that of sovereigns, businesses and households, increased by $10 trillion in the six months to June to about $307 trillion. The last peak in global debt was in early 2022, when central banks began to significantly raise interest rates.

The ratio of global debt to GDP has been declining due to high inflation, but by June this year it had risen to 336%, an increase of 2 percentage points from the beginning of the year. But it’s still down from a peak of about 360% during the coronavirus pandemic.

The increase in debt comes as rising interest rates in most countries push up borrowing costs, a key determinant of sovereign credit ratings. At the same time, financing the climate transition also puts pressure on governments to increase spending.

“We are concerned that countries will have to allocate an increasing share of interest payments,” said Emre Tiftik, lead author of the IIF report. “This will have long-term consequences for countries’ financing costs and debt dynamics.”

The IIF said that more than 80% of new debt in the first half of the year came from mature markets, with the United States, Japan, the United Kingdom and France seeing the largest increases.

“Rising interest charges are a key risk to public finances and sovereign ratings, particularly in developed markets,” said Edward Parker, managing director at Fitch Ratings, which downgraded the U.S. earlier this year. express.

Despite rising debt levels, nominal interest expense in developed markets was flat between 2007 and 2021. “But the free lunch is over and interest payments are now growing faster than debt or income,” Parker said.

The cost of debt interest is expected to continue to rise as more debt is refinanced and interest rates remain higher to combat inflation, the report said. On Tuesday, the OECD warned that central banks should keep interest rates high or raise them further to curb inflation despite growing signs of economic stress.

The IIF said it was particularly concerned about the rise in interest payments on local currency debt in emerging markets, which now account for more than 80% of total interest costs in emerging markets.

It warned that high levels of domestic debt make them vulnerable as more countries are forced to restructure their debt, as the IMF’s debt restructuring plans are geared more towards external creditors such as investment funds and other sovereigns and Foreign currency debt.

“The traditional tools we have are primarily designed to address external debt vulnerabilities, leading emerging markets into a vicious cycle of debt and inflation at the expense of a sharp decline in potential growth,” Tiftik said.

The report comes after the International Monetary Fund warned governments last week that “urgent measures should be taken to help reduce debt vulnerabilities and reverse long-term debt trends.”

“Reducing the debt burden will create fiscal space and allow for new investment, helping to boost economic growth in the coming years,” the IMF said.


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