WHY IN NEWS ?

  • Recently global debt rose to an all­time high of $307 trillion in the second quarter, by the end of June 2023.

WHAT IS GLOBAL DEBT ?

  • Global debt refers to the borrowings of governments as well as private businesses and individuals.
  • Governments borrow to meet various expenditures that they are unable to meet through tax and other revenues.
  • Governments may also borrow to pay interest on the money that they have already borrowed to fund past expenditures.
  • The private sector borrows predominantly to make investments.

WHY GLOBAL DEBT IS RISING ?

  • Both global debt in nominal terms and global
  • debt as a share of GDP have been rising steadily
  • over the decades.
  • Most (over 80%) of the rise in global debt in the first half of the year has come from advanced economies such as the U.S., the U.K., Japan, and France.
  • Among emerging market economies, China, India and Brazil have seen the most growth in debt.
  • During the first half of 2023, total global debt rose by $10 trillion.
  • This has happened amid rising interest rates, which was expected to adversely affect demand for loans.
  • But a rise in debt levels over time is to be expected since the total money supply usually steadily rises each year in countries across the globe.
  • The rise in global debt levels witnessed during the first half of the year is nothing out of the ordinary and does not per se have to mean trouble for the global economy.
  • In fact, even a simple rise in the total amount of savings in an economy can cause a rise in debt levels as these increased savings are channelled into investments.

GLOBAL DEBT : A CAUSE OF CONCERN ?

  • Rising global debt levels usually leads to concerns about the sustainability of such debt.
  • This is particularly so in the case of government debt which is prone to rise rapidly due to reckless borrowing by politicians to fund populist programmes.
  • And when central banks raise interest rates, servicing outstanding debt becomes a challenge for governments with a heavy debt burden.
  • Rising interest rates can increase pressure on governments and force them to either default outright or inflate away their debt.
  • Many analysts believe that several governments will never be able to pay their debt in full and that inflating away debt is the only way for such governments to avoid an outright default on their debt.
SYLLABUS: PRELIMS, ECONOMY