The world has completely fallen into the cult of debt, on all fronts. According to an September analysis by the Institute of International Finance, global debt, which includes liabilities to governments, businesses and households, rose to a record $ 296 trillion during the second quarter of this year. This is about a fifth more than last year on the eve of the prologue to the coronavirus pandemic. The central banks of the world are encouraging them to live on debt at low rates, but a future return to normalcy may be the trigger for the next crisis.
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“The policy of extremely cheap money is still going on and this is one of the consequences. Government indebtedness is rising, money is going to mortgages, and corporate indebtedness is rising, ”says Patria Finance economist Tomáš Vlk. However, readily available debts are changing the global economic climate.
“Central bank actions weaken the disciplinary function of the financial market. The valuation of a number of bonds does not at all reflect the credit risk of issuers, whether companies or countries, “says Cyrrus economist Tomáš Pfeiler. At the same time, according to him, central banks are contributing to the growing number of so-called zombie companies, which are artificially kept alive by extremely cheap financing.
However, currently rising inflationary pressures around the world present central bankers with a dilemma when choosing between a cooling of post-pandemic economies and a faster rate of price growth. The challenge for bankers will be to cut the world’s cheap money off.
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“Given such a high level of debt in the global economic system, it will by no means be possible for key central banks led by the US Fed and the European Central Bank to be able to tighten their current ultra-loose monetary policy stance more significantly in the coming years,” said Consequ analyst Michal Stupavsky. .
According to statistics from the Institute of International Finance, total global debt currently exceeds 350 percent of the annual output of the world economy. Before the start of the pandemic, the ratio was just over 320 percent. “The ratio of debt to the performance of the world economy is close to an all-time high,” adds Stupavský.
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Last year, the world’s central banks virtually cut key interest rates in the economy to zero, which, among other things, allowed world governments to finance their pandemic deficits significantly cheaper.
“The loose budgetary policy of key states and economies has a major impact on the growth of world debt associated with the pandemic. The long-term development of the world economy will primarily affect the ability of key countries to abandon this loose fiscal and monetary policy after the pandemic subsides, ”emphasizes Petr Kříž, a partner at the consulting company PwC.
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