The debts of governments, companies and individuals globally have increased significantly, raising concerns about the sustainability of debt and its impact on the global economy.
A report in the British newspaper “The Telegraph” said that the continued rise of debts has become a global phenomenon. Debt ratios had previously risen significantly after the global financial crisis of 2009-2011, followed by a heated debate about the importance of reducing these debts by increasing taxes and reducing spending.
The report pointed out that the coalition government in Britain designed its entire strategy around this necessity, and it succeeded for some time in reducing the debt ratio from about 80% to slightly more than 70% before excessive spending during the Corona pandemic led to it rising again.
Economists were quoted as saying that high debt ratios pose an extreme risk when they exceed a certain level because they lead to financial crises and lead to a decline in economic growth rates. These experts estimated the critical level at 90% of the gross domestic product.
But the author of the report, Roger Bott, considered this rate somewhat strange, especially since debt rates in Japan and Italy have been high for a long time, and the same has been the case for the United Kingdom historically.
On the other hand, it was also reported that some prominent economists said that whatever level of public debt was safe before, the standard is now much higher because we are now in an era where real interest rates (nominal interest rate less inflation rate) are much lower.
The writer believed that there is no magic level for the ratio of public debt to GDP, because what matters is the relationship between the growth rate and the interest rate.
He said if the economic growth rate is higher than the interest rate, and if the primary budget is balanced, the debt ratio will decrease.
He added: This means that any country can manage a primary budget deficit sustainably and maintain the stability of the debt ratio, and the extent depends on the degree to which the economic growth rate exceeds the level of the interest rate at which it must borrow. The conditions of this relationship worsen as the initial level of the debt ratio increases.
The writer pointed out that the recent rise in real interest rates and bond yields does not necessarily pose a problem for the sustainability of public debt if these high rates are consistent with increases in the rate of sustainable economic growth.
He said that some countries should pay a higher level of global interest rates to reflect the specific risks they face, even if their growth rate has not increased, and Italy is a clear example in this regard, as it has not recorded any significant growth since 2006 and there is little possibility in the future. For higher growth.
Borrowing in local currency
The writer stated that countries also differ in another very important aspect: If the government borrows money in the currency it issues, the risk of default for its bond holders remains very small, and in times of crisis, such countries are always able to persuade their central banks to buy their debt. , thus paying the interest and actually repaying the debts with money that it issued itself.
Among the countries that fall into this category – the writer says – are the United States, the United Kingdom, and Canada. This does not mean that the holders of these bonds do not face any risk at all.
Although explicit default is highly unlikely, such countries may still indulge in implicit default by allowing inflation to rise, the author explains.
In contrast – the writer adds – Italy is once again exposed to danger, as the matter is not limited to its debt ratio of 142% of GDP, but also because it does not borrow in the currency it issues, as it is obligated to borrow in the euro issued by the European Central Bank.
The end result of all this – the author adds – is that many governments are severely constrained by their fiscal position and will be forced to follow strict budget policies in an attempt to keep total debt rising slowly or reduce it slightly if possible.
A report published in the British newspaper “Financial Times” talked about growing concern about the corporate debt crisis and its potential impact on the global economy.
The report said, “The debts accumulated on companies have reached record levels, which reinforces fears of a major financial crisis that may affect the stability of financial markets and national economies.”
The Institute of International Finance had previously said that “global debt reached $307 trillion by the second quarter of this year, despite monetary tightening measures.”
