Across the globe, international debt is a complex and dynamic phenomenon that affects many elements at the heart of national economies. Borrowing is seen as a critical mechanism to support economic growth, finance infrastructure and fund processes in both developing and developed countries.
However, borrowing can also lead to economic instability, budget deficits and financial crises. Therefore, properly managing the borrowing strategy is vital for national economies.
Since the early 2020s, especially in 2020, when the COVID-19 pandemic broke out, there has been a significant increase in borrowing rates around the world. The pandemic shook the global economy, causing many countries to experience economic contraction. During this period, many governments created wide-ranging fiscal stimulus packages to revive the economy and protect employment. This has pushed borrowing rates even higher.
In 2020, total debt worldwide reached 320% of global GDP. This is an increase of around 30 percentage points from around 290% in previous years, due to the pandemic. This represents a record increase in global debt.
According to the Institute of International Finance (IIF), by 2023, the total amount of debt held by governments, the public and businesses will reach 307 trillion dollars. In the first half of 2023 alone, this debt increased by $10 trillion, reaching a record high.
The reasons for the increase in debt include low interest rates encouraging investors to borrow, the need for governments to finance infrastructure and development projects, and financial gaps created by global economic imbalances.
However, this increase poses a risk especially for developing countries. Debt has become a significant part of their budgets, and this can have a negative impact on economic growth and investor confidence. Moreover, a possible recession in the global economy or a rise in interest rates could further exacerbate the debt burden.
As a result, high levels of global debt levels in 2023 are a serious concern for the soundness and financial stability of national economies. Therefore, the importance of debt management and sustainable debt policies has become even more critical in today's global economy.
America's debt situation
The United States is the world's largest debtor country. As of 2023, the total US debt exceeded $30 trillion. This is equivalent to about 125% of the US GDP.
The US debt burden has increased significantly, especially in recent years. This increase is a result of the fiscal stimulus against the COVID-19 pandemic in 2020 and economic uncertainties due to the Russia-Ukraine war in 2022.
The US's high debt burden poses a significant risk to the country's economy. Debt service payments account for a significant portion of the US budget, which could negatively impact economic growth. Moreover, if interest rates rise, the US debt burden is expected to become even heavier.
Debt situation of major economy countries
Other major economies around the world are also under significant debt burdens.
- Japan's total debt exceeded $25 trillion by 2023. This is equivalent to about 250% of Japan's GDP.
- China's total debt exceeds $32 trillion by 2023. This is equivalent to about 280% of China's GDP.
- Germany's total debt exceeds USD 3.2 trillion by 2023. This is equivalent to about 70% of Germany's GDP.
- The UK's total debt exceeds USD 2.3 trillion by 2023. This is equivalent to about 90% of the UK's GDP.
In these countries, debt service payments are also a significant portion of budgets, which could negatively impact economic growth. Moreover, if interest rates rise, the debt burden of these countries is expected to become even heavier.
Possible impacts of the debt crisis
High debt levels around the world can lead to a debt crisis. A debt crisis is an economic situation in which a country or region is unable to make debt payments. Debt crises can lead to instability in financial markets, economic stagnation and even recession.
By 2023, the world economy is at risk of a debt crisis. Developing countries are particularly vulnerable to a debt crisis if their debt burdens become even heavier.
The possible effects of a debt crisis include
- Instability in financial markets
- Economic stagnation
- Insolvency of financial institutions