Government global debt at the end of fourth-quarter 2019 was an overwhelming $70 trillion, which represented a record high.
A year later, due to the COVID-19 virus, we can only look back at this number wistfully. The total global debt at the end of the fourth quarter of 2020 is expected to reach $277 trillion, creating a debt to GDP ratio of 365 percent. Like a brutal tsunami, global debt has been pushed beyond control and is breaking records.
Around the globe, countries are experiencing an unfortunate commonality: exploding pandemic debt. Most of the new debts are the result of governments borrowing funds in an attempt to save businesses and individuals from the disasters created by shutdowns and stay-at-home mandates.
EU countries have seen a debt increase of $1.5 trillion, for a total of $53 trillion of debt. Interestingly, this is a bit lower than the high of $55 trillion for this region in 2014.
While the pandemic has played a large role in increasing global debt, it is not the sole villain. Said debt has been skyrocketing out of control since 2016, with an increase of $52 trillion. The pandemic-related debt, huge as it is, is merely stacking on top of an already staggering amount of owed funds.
As may be expected, developing countries – or 60 percent of the global economies – are especially hard-hit by this spiraling debt.
The World Bank and the International Monetary Fund (“IMF”) have promised to help. This, however, has been more difficult than anticipated. Migrant workers in the US and EU have had difficulty sending funds to families at home – a huge part of the developing countries’ income. Tourism in these countries has lagged. Medical facilities are short of supplies, and citizens lack food.
Daily life has become a daily struggle in survival. According to the World Bank, 150 million people will sink into dire poverty by 2021. While the World Bank and the IMF have expressed concern, this concern has not translated into actual support and help for those who need it the most.
Wealthy countries have been relying on a cushion of excessive borrowing by their central banks to keep their economies afloat. This borrowing is estimated to exceed $8 trillion.
Emerging nations have not had that cushion to help them, although the IMF and World Bank have tried to extend support to these nations.
Of the emerging nations, Zambia is the sixth to default on its debt. By 2021, $7 trillion of third world debt will come due. Fifteen percent of that is in US dollars. Many defaults are expected. One reason for the existing and anticipated third world defaults is the fact that many third world markets are not helping their own economy. Instead, they are paying off interest and principal on already existing debts, thereby only increasing their deficits.
The surge in debt actually began prior to the pandemic. The global economies were gradually recovering from the 2008 financial crisis. In 2016, however, the debt increased by $52 trillion. This indicates that even before the pandemic tsunami struck in 2020, the global economy was surviving increasingly on debt accumulation.
We know that tax revenues will continue to decrease while spending by governments will increase. Higher budget deficits are definite.
The goal is to curtail the worst of the damage that will arise from bankruptcies, debt defaults, and high unemployment. The future is still filled with uncertainty, however. Will countries be able to recover fully from this pandemic? Some may suffer permanent and irreparable damage. In that event, budget deficits will grow while tax revenue will shrink permanently.
Another problem will be debt servicing if interest rates rise from their current near-zero level. In that event, debt servicing alone will make up a growing portion of government debts globally.
The 2020 pandemic has caused havoc around the world. It is yet to be seen whether government action can help prevent a catastrophe.