Emre Tiftik, a director at the IIF, believes countries have become addicted to debt.
“Right now most countries have a growth model that is completely based on borrowing,” he says.
“And whenever that borrowing slows down, we see less growth. Over the medium to long term that has big, negative consequences, so we are worried. Especially if the pace of that debt accumulation is extremely rapid.”
Debt can’t always be subdued
Higher interest rates have also sent the cost of servicing debt soaring as some continue to borrow huge amounts to plug the gap between tax revenues and public spending.
This has alarmed both bankers and economists.
Jamie Dimon, the chief executive of JP Morgan, warned last week that borrowing around the world was too high.
He said: “I look at the financial situation and the fiscal spending – it’s more than it’s ever been in peacetime by a long shot, with the highest government debt levels we have ever had. And there’s this omnipotent feeling that central banks and governments can manage all of this stuff [but] I’m cautious.”
Mohamed El-Erian, chief economic adviser at Allianz, says the debt reckoning will not hit countries equally. “While debt burdens are rising in most countries around the world, the implications vary quite a bit,” he says.
“Some countries are particularly well placed to handle the heavier debt loads, especially as they have solid medium-term growth potential and benefit from structural advantages such as deep financial markets and global acceptance for their currency.
“Others are already at or very near breaking point, lacking external or domestic resources to meet their heavy and increasing debt servicing.”
Those at breaking point include many developing economies which are shut out of international debt markets.
Tiftik says that of the 73 countries identified by the World Bank as being among the poorest and most vulnerable during the pandemic, just two were able to borrow externally this year.
“Only Mongolia and very recently Uzbekistan this month were able to raise capital from international debt markets,” he says. “The rest don’t have access.”
“Many are being crushed under the weight of their debts,” says Tiftik: “In some African countries, more than 50pc of government revenues are going to interest expenses.”
Others have already defaulted. Last year saw the highest number of sovereign defaults since 1983 – a number that could easily be surpassed in 2023.
Rising interest rates have led to missed payments on debt worth a record $550bn alone this year, up from $330bn in 2019, according to the IIF.
While this represents less than 1pc of outstanding debt, the trend is clear as more countries drown in debt.
A silent crisis
Ayhan Kose, the World Bank’s deputy chief economist, says that even if countries do not default, many are already in the middle of a “silent debt crisis”, where borrowing over a number of years has left countries permanently teetering on the brink of bankruptcy.
Dollar-denominated debt also remains an issue for countries as the combination of rising interest rates and fears about the global economy push up the value of the dollar compared with emerging market currencies.
