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Wednesday, July 6, 2022

Global debt crisis in sight?

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The 1920s are poised to rival shocks of the last century: the decade then ended with an historic economic earthquake. According to a World Bank report, in 2020 alone, economic activity fell in 90% of countries, the global economy shrank by about 3% and global poverty increased for the first time in a generation. The two-year pandemic has shot up national debt by just over 25%.

With the economy kneeling on the canvas and knocked out, the invasion of Ukraine has amplified that game. Western governments were forced to borrow more money to fund anticipated defense spending. The global economic scenario hardly resembles that of late 2019. The severe fallout in sectors such as energy, logistics and grains are just the tip of the iceberg.

Never before in history has the world economy been so heavily indebted, both in absolute terms and as a percentage of GDP. Over the past few decades, the planet’s inhabitants have become accustomed to a world dominated by credit, debt, and all kinds of financial products.

In this way, according to the latest data from the International Monetary Fund (IMF) and the Institute of International Finance, the volume of debt issued worldwide amounts to around 296 billion US dollars. That’s about 227 times the size of the Spanish economy. A staggering figure that accounts for around 350% of global GDP.

Over the past decade, this massive debt accumulation has had two main players: the public sector and China.

On the one hand, governments have displaced corporations as the largest debtors in recent years. In fact, the amount of public debt issued is already equivalent to almost 100% of global GDP, almost as much as the debt that corporations, families and governments themselves totaled in the 1970s. A development that was accelerated by the shock caused by the corona virus, but whose structural development is long overdue.

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On the other side, keep pounding volcano from China. Since the 2008 crisis, the Asian giant’s economy has doubled its debt volume compared to the 20% growth recorded globally. In this case, the main protagonists were public companies, which significantly increased their investment and spending to boost the country’s economic growth.

On the other side of the world map, nobody is aware of the constant rebound effect. A traditional one among the major developed economies locomotive Like Germany, it has the largest percentage increase, with debt rising 14.7%, nearly double the global average.

the positive reading

Despite this huge escalation in global debt, the good news is that real interest rates paid by borrowers have continued to fall. According to many experts, this could be due to a structural change in the economy. Demographic aging, globalization and greater inequality in developed countries may explain this paradox: that the world is becoming more indebted while financing is becoming cheaper.

But what are the implications of this enormous tsunami of bonds, credits and debts of all kinds and what does the new policy announced by the main central banks mean? They are analyzed in the last video by If I had known, the financial information channel of Mutuactivos.

Source elpais.com

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