A potential debt crisis casts an ominous shadow over the global economic landscape, per an article in RBI’s latest monthly bulletin.

International Monetary Fund’s (IMF’s) Global Debt Monitor reported total global debt (private plus public) to have risen to $235 trillion, equivalent to 238 per cent of global GDP, the article “State of the Economy”, put together by RBI officials, said.

They warned that there is grave concern that fiscal prudence may take a back seat in 2024 as more than half the world’s population goes to elections.

Gathering storm

“As interest rates remain elevated to fight stubborn inflation, debt servicing costs are spiralling. This can feed a vicious cycle of financial instability by straining government finances and household budgets, choking off credit and investment. Unsustainable debt levels can worsen sovereign ratings and constrain governments’ ability to raise resources for productivity-enhancing public investments. Overleveraged corporations can face heightened bankruptcy risks,” the authors said.

At the household level, precarious finances can portend drastic cuts in consumer spending amidst job losses and higher borrowing costs, thereby stifling aggregate demand, they added.

“The debt crisis has already affected developing countries the most, accentuating their vulnerabilities. A full blown debt crisis could reverse decades of progress on poverty alleviation, fighting disease, and taking forward development. The time to act against the gathering storm is now, beginning with reforming the international financial architecture, democratising finance, harmonising cross-border bankruptcy regimes and adequately funding multilateral safety nets,” the authors said.

Published on May 21, 2024