China, US lead rise in global debt to record high $305 trillion - IIF

The world's two largest economies borrowed the most in the first quarter as global debt rose to a record above $305 trillion, while the overall debt-to-output ratio declined, data from the Institute of International Finance showed on Wednesday.

China's debt increased by $2.5 trillion over the first quarter and the United States added $1.5 trillion, the data showed, while total debt in the euro zone declined for a third consecutive quarter.

The analysis showed many countries, both emerging and developed, are entering a monetary tightening cycle -led by the US Federal Reserve- with high levels of dollar denominated debt.

"As central banks move ahead with policy tightening to curb inflationary pressures, higher borrowing costs will exacerbate debt vulnerabilities," the IIF report said.

"The impact could be more severe for those emerging market borrowers that have a less diversified investor base."

The yield on the benchmark 10-year Treasury note has risen some 150 basis points so far this year and earlier this month hit its highest since 2018.

Sovereigns beware 

Corporate debt outside banks and government borrowing were the largest sources of the increase in borrowing, with debt outside the financial sector rising above $236 trillion, some $40 trillion higher than two years ago when the COVID-19 pandemic hit.

Government debt has risen more slowly in the same period, but as borrowing costs rise sovereign balance sheets remain under pressure.

"With government financing needs still running well above the pre-pandemic levels, higher and more volatile commodity prices could force some countries to increase public spending even further to ward off social unrest," said the IIF.

"This might be particularly difficult for emerging markets that have less fiscal space."

The lack of transparency has also become a burden for emerging markets, where total debt is approaching $100 trillion from $89 trillion a year ago.

"The lack of timely disclosure of public debt obligations, very limited coverage of contingent liabilities (including SOE liabilities) and the extensive use of confidentiality clauses are the major impediments causing information asymmetries between creditors and debtors," said the IIF report, noting that it pushes borrowing costs higher while limiting access to private capital markets for EM borrowers.

The global debt-to-GDP ratio fell to 348%, about 15 percentage points below the record set a year ago, with major improvements seen in European Union countries. Vietnam, Thailand and Korea posted the largest increases in that measure, the IIF said.

"Growth is expected to slow significantly this year, with adverse implications for debt dynamics," said the IIF report.

"On the back of strict lock-downs in China and tighter global funding conditions, the anticipated slowdown will likely limit or even reverse the downward trend in debt ratios."