Global debt reaches almost $305 trillion in Q1, nearing record levels: Trade group.

Global Debt Levels Soar to Nearly Record High

The Institute of International Finance (IIF) has reported that global debt levels have risen by $8.3 trillion in the first quarter, reaching $305 trillion, which is almost a record high. The previous record of $306.5 trillion was set in the first quarter of 2022. The IIF’s latest Global Debt Monitor report shows that debt levels are increasing across the world, from households to governments. Government debt has surged by $2.2 trillion, household debt by $1.1 trillion, financial corporate debt by $2.1 trillion, and nonfinancial corporate debt by $3.1 trillion. These figures are up by more than 17% from before the COVID-19 pandemic, when the total global debt was $260.3 trillion in the fourth quarter of 2019.

Debt Totals Expected to Continue Rising

Researchers warn that debt totals will continue to rise, which will have “significant implications for international debt markets, particularly if interest rates remain higher for longer.” The IIF stated that “at close to $305 trillion, global debt is now $45 trillion higher than its pre-pandemic level and is expected to continue increasing rapidly: Despite concerns about a potential credit crunch following the recent turmoil in the banking sectors of the U.S. and Switzerland, government borrowing needs remain elevated.”

Dramatic Increase in Debt Service Costs

The IIF has also noted the dramatic increase in debt service costs. “The combination of high debt levels and rising interest rates has pushed up debt service costs, prompting concerns about the use of leverage in the financial system,” the report reads. Since early last year, the Federal Reserve and other central banks have initiated a quantitative tightening cycle, a blend of rate hikes and balance sheet reductions. As a result, the Fed has raised the benchmark fed funds rate by 500 basis points to a range of 5–5.25%, the highest in about 16 years.

Growth of Zombie Firms?

In addition to central banks raising interest rates, banking turmoil in the U.S. and European financial sectors has weighed on credit conditions. Many U.S. reports have suggested that the economy faces a credit crunch, with financial institutions tightening standards and business and consumer loan demand sliding. A combination of higher interest rates and a contraction in credit conditions “would prompt higher default rates and result in more ‘zombie firms,'” according to the IIF. Zombie firms are generally businesses that maintain operations and service their obligations but can’t pay off their debts. The IIF estimated that 14% of U.S.-listed firms fall into the zombie category.

Higher Service Payments for Consumers

A rising-rate climate has become problematic for both the U.S. government and consumers. According to the Congressional Budget Office, federal interest payments are projected to total $663 billion in fiscal 2023 and then balloon to $745 billion in 2024. Consumers with credit card debt are also facing higher service payments, and the Fed Bank of New York reported that credit card debt surged to $986 billion in the first quarter. WalletHub’s Fed Rate Hike Survey estimated that the institution’s rate hikes in the past year would cost credit card debt holders more than $33 billion over the next 12 months.