Global debt has reached unprecedented levels since the start of the COVID-19 pandemic in what the Institute for International Finance (IIF), whose members include more than 400 banks and financial institutions, has called an “attack of the debt tsunami”.
In its Global Debt Monitor report released on Wednesday, the IIF said global debt would set a new record high and reach $277 trillion by the end of the year, or 365% of global GDP.
“Encouraged by a sharp increase in government and corporate borrowing as the COVID-19 pandemic drags on, the global debt burden increased by $15 trillion in the first three quarters of 2020 and is set to decline. now stands at $272 trillion,” the IIF report said.
The extent of debt acceleration is revealed in data for individual countries and regions. Debt in major economies jumped to 432% of GDP in the third quarter, from around 380% at the end of 2019. Emerging market debt hit nearly 250%, China’s 335%.
In the United States, total debt is on track to reach $80 trillion this year, up from $71 trillion at the end of last year. Debt in the eurozone rose by $1.5 trillion in the first nine months of this year.
The IIF report says the debt burden is particularly heavy for emerging economies, having risen 26% this year as a share of GDP. As a result, the share of government revenue in these countries destined to make payments to international finance capital has risen sharply.
This week Zambia became the sixth developing country to default on a loan and more defaults are expected. By the end of next year, some $7 trillion of emerging market syndicated bonds and loans will mature, about 15% of which will be denominated in US dollars.
The debt crisis of these countries is aggravated by the slowdown in the global economy which, according to the International Monetary Fund, is expected to contract by 4.4% this year. The IMF predicted a rebound for 2021, but that forecast was released before the latest spike in COVID-19 infections in the United States and Europe.
The surge in debt is not solely attributable to the pandemic. Even before it hit, the global economy was sliding into a slowdown after a brief “recovery” in 2018 from the impact of the 2008 financial crisis.
“The pace of global debt accumulation is unprecedented since 2016, increasing by more than $52 trillion,” the IIF said.
While $15 trillion of this increase was recorded in 2020, the increase in debt from 2016 far exceeded the $6 trillion increase between 2012 and 2016. In other words, before Even as the pandemic hit, the entire financial system and the global economy became increasingly dependent on the accumulation of debt.
Emre Tiftik, director of sustainability research at the IIR, said debt levels had risen much faster than expected at the start of the crisis. There is less “return on investment” when it comes to growing the economy.
Tiftik said the increase in debt with no change in the level of economic growth “suggests that we are seeing a significant reduction in the ability of debt to generate GDP. Aggressive support measures will be with us for some time and will inevitably increase the debt significantly.
The reasons for the divergence between debt levels and GDP growth are not hard to find. Much of the rising debt of emerging market economies is not used to stimulate their economies and improve health, education and other necessary measures, but is used to pay interest and principal on existing debts.
In large economies, such as the United States and Europe, debt is not incurred to finance infrastructure or health care measures. It has been used to finance massive corporate bailouts or is taken on by companies to finance their speculative operations in the financial markets. None of this generates an atom of real wealth but serves to increase the profits obtained from financial operations.
However, if the flow of money is reduced, it threatens to trigger a financial crisis, with immediate effects for the real economy, as revealed by the 2008 financial crisis.
The IIR has highlighted this danger.
“There is great uncertainty about how the global economy can deleverage in the future without significant negative consequences for economic activity,” he said.
Another record reached in the financial markets earlier this month also underlines the growing instability of the whole system in the face of the “tsunami of debt”.
According to the Bloomberg Barclays Global Negative Yielding Debt Index, bonds worth $17.05 trillion now have a negative yield, meaning the price of the bond is so high that an investor would suffer a loss s he kept the bond until maturity.
Of course, no investor spends huge sums of money to suffer a loss. They are betting that the price of the bond will rise further and drive the yield down (two have an inverse relationship) and that they will realize a capital gain on the sale.
The bond market is only supported by interventions from global central banks – with the Fed alone spending $80 billion a month, or nearly $1 trillion a year, to buy US government debt.
As Mark Dowding, chief investment officer at BlueBay Asset Management, told the FinancialTimes“Central banks have bought up more debt than governments can impose on them. This pushed yields lower despite the huge fiscal expansion.
But the low yields have completely disrupted the investment strategies of pension funds and life insurance companies, which have traditionally relied on safe government bond yields to meet their obligations.
The result, as Dowding noted, is pushing investors into increasingly risky debt financing for governments and corporations as they seek a higher rate of return. The same process drove stock markets to near-record highs following the injection of trillions of dollars by financial authorities.
The massive growth in debt has decisive and immediate implications for the struggle of the working class to defend itself against the “tsunami of death” unleashed by the refusal of capitalist governments to take any meaningful action to combat the pandemic.
Debt, like all other financial assets, is not a value in itself. It is a form of fictitious capital – a future claim on the surplus value extracted from the working class in the capitalist production process.
If this process is interrupted in any way, the mountain of fictitious capital is in danger of collapsing. This was seen in mid-March when the initial impact of the pandemic and growing demands from workers for action against it caused all financial markets to freeze. The potential collapse was only averted through the intervention of the Fed and other central banks and the accompanying back-to-work campaign.
Now, in the second and third waves of the pandemic, the demand of all sections of the financial oligarchy and their political representatives is that there must be no lockdown. That is to say, no effective measures will be taken to deal with the pandemic on the basis of the closure of non-essential services and industries with compensation for the workers concerned.
Surplus value must continue to be pumped out of the working class, regardless of the cost of living.
The current situation underscores the WSWS’s insistence that the solution to the pandemic crisis lies in the development of the independent struggle of the international working class to seize political power in order to launch a socialist program.
