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Institute of International Finance has warned that the international financial infrastructure is not equipped to handle unsustainable domestic debt levels
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A report released by Institute of International Finanace(IIF) last week states, the global debt is at an all time high of $ 307 trillion by the end of June 2023.
The global debt increased by $100 trillion over the last decade.
What is Global debt
Global debt comprises the borrowing of Governments, Private business and Individuals.
Government may borrow to pay the interest of early borrowings and Business borrowing predominantly to make investments.
Why Global debt is raising,
In terms of nominal and GDP global debt have been raising steadily over decades.
During pandemic , there was a halt due to sluggish economy and lending get slow down.
80% of the global debt coms from the emerging economies like , US, U.K, Japan and France.
Among emerging economies like China, India and Brazil also mark growth in the debt.
This has happened amid raising interest rates, which adversely affected the demand for loans.
But raise in the global debt, increases the global money supply.
In Fact even a simple amount of rise in the total savings in an economy can cause a rise in det level as these increased savings are channelized investment.
An interesting fact in the report is drop in global debt as a share of GDP over seven consecutive quarters prior to 2023.
Is it a cause of worry?
Rising global debt leads to concerns about sustainability of such debt.
Particularly in the case of government debt which is prone to rise rapidly due to reckless borrowing by politicians to fund populist programmes.
In addition to this, when central banks raise interest rates, servicing outstanding debt becomes a challenge for governments with a heavy debt burden.
In western economies, despite rising debt levels over last decade, the interest that governments had to pay lenders largely remained manageable due to extremely low interest rates.
This is set to change now, to handle the inflation price as the result of post pandemic central banks raised the interest rates.
Many analysts believes that most governments are not able to pay there debt in ful, that inflating away debt is the only way for such governments to avoid an outright default on their debt.
In its report, the IIF has also warned that the international financial infrastructure is not equipped to handle unsustainable domestic debt levels.
The most recent example of the same was the 2008 global financial crisis.
Private debts also rise the issue of sustainability.
If the lending is not backed by genuine savings, It leads to unsustainable boom and economic crisis.
The crisis was immediately preceded by an economic boom fueled by the U.S. Federal Reserve’s easy credit policy.
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