First quarter sees global debt soar to almost $305 trillion, trade group says

Global debt has surged to almost $305 trillion in the first quarter, ringing alarm bells about the increasing cost of servicing this debt and the financial system's leverage, according to a prominent study.

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The Institute of International Finance (IIF), a leading financial services trade association, reported on Wednesday that global debt increased by $8.3 trillion in the first three months of this year compared to the end of 2022, reaching $304.9 trillion. This figure marks the highest since Q1 of last year and stands as the second-highest quarterly reading ever recorded.

“Global debt is now $45 trillion higher than its pre-pandemic level and is expected to continue rising sharply,” stated the IIF in its quarterly Global Debt Monitor.

While the debt-to-output ratio peaked near 360% in 2021, it has since stabilised around 335%, a level higher than pre-pandemic figures. Mounting pressures on government spending, including ageing populations and increasing healthcare costs, are major contributing factors. The IIF report also highlighted that “heightened geopolitical tensions are expected to drive further increases in national defence spending over the medium term.”

Interestingly, the report focused on the impact of last year’s abrupt increase in rates on some bank balance sheets. Despite recent bank failures appearing more isolated than systemic, the study highlighted a significant surge in deposit withdrawals from U.S. regional banks due to the fear of contagion.

The IIF expressed concerns that stricter lending practices among smaller banks could hit certain businesses and households particularly hard. The report pointed out that given the vital role regional banks play in the U.S. credit landscape, concerns over their liquidity positions could trigger a severe contraction in lending to certain sectors.

Another critical point in the report was the expanding shadow banking sector, characterised by credit intermediation from non-bank financials. The IIF stated, “Shadow banks now account for more than 14% of financial markets, with the majority of growth coming from a rapid expansion of U.S. investment funds and private debt markets.”

One point of particular concern was the large portion of corporate debt held by life insurance companies, which the report noted could increase their exposure to less liquid assets.

Emerging markets (EMs) were also underlined, with 75% of the IIF’s EM universe witnessing an increase in dollar-term debt levels in Q1. The total debt crossed the $100 trillion threshold for the first time, with China, Mexico, Brazil, India, and Turkey posting the largest increases.

However, the report warned that as the interest rate differential between EMs and mature markets narrows, EM local currency debt is becoming less appealing for foreign investors. Some larger EMs have benefited from the relative weakness of the dollar, which has drawn investors to their local currency debt. Yet for others, accessing markets has been increasingly challenging due to tighter spreads as rates rise in developed markets or fast-rising borrowing costs.

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