'We have a debt problem'—World Economic Forum sounds alarm on record global deficits

Financial and political leaders landed in Davos for the World Economic Forum joined a growing chorus of economists warning of a global debt trap.

“We have a debt problem globally,” said Tim Adams, head of the Institute of International Finance (IIF), a global industry association. “We have the highest levels of debt in a nonwar period in modern history and it’s at the corporate, household, sovereign, sub-sovereign [levels].”

“We need sobriety, and we need to focus on how we are going to get our fiscal house in order,” he said while lamenting America’s massive deficit, which runs at 7% of GDP.

Gita Gopinath, the deputy managing director of the International Monetary Fund (IMF), echoed Adams’ concerns, telling Bloomberg in Davos that “debt is at extremely high levels.”

Once again, the U.S. is in the eye of the storm as it continues to load up on debt to fund historic spending programs.

“When you put that much of U.S. bonds on the market, it can crowd out other kinds of funding around the world,” she said. “Many countries borrowed a lot during the pandemic. That was short-term in nature, and that’s coming due.”

By the IFF’s own projections, global debt reached a record $307.4 trillion in the third quarter of 2023. The industry association expects that number to have reached $310 trillion by the end of the year.

Developing nations risk a “lost decade”

Experts think rising global debt levels aren't so much a problem for developed worlds as they are a threat to developing countries.

In fact, the World Bank is concerned that developing countries—and lower-income nations, in particular—are at risk of a “lost decade” caused by extreme indebtedness and high debt servicing costs.

As Creditnews reported before, developing countries spent a record $443 billion servicing their debt in 2022—a 5% increase from 2022.

All that money went toward principal and interest payments on their loans instead of back into the economy where it’s needed most.

How did developing countries get into this mess? By borrowing recklessly when interest rates were at all-time lows and economic growth was strong.

Their strategy seemed to be working until Covid ravaged the global economy, triggered an inflationary spiral, and resulted in a sharp rise in interest rates.

There's a growing consensus among economists and analysts that interest rates will go down this year, but some experts beg to differ.

In fact, Harvard economist Kenneth Rogoff, believes interest rates will stay elevated over the next decade regardless of what happens to inflation.

“Even if inflation declines, soaring debt levels, deglobalization, and populist pressures will keep rates higher for the next decade than they were in the decade following the 2008 financial crisis,” Rogoff wrote for Project Syndicate, an op-ed publication.

Higher interest rates are especially challenging for governments, notes the IMF.

“Frontier and low-income countries are having a harder time borrowing in hard currencies like the euro, yen, U.S. dollar and U.K. pound as foreign investors demand greater returns,” IMF director Tobias Adrian wrote in October.

When does debt become truly unsustainable?

While many experts agree that global debt has spiraled out of control, there’s no uniform definition for what makes debt “unsustainable.”

According to Fidelity, “There may not be a “magic number” that serves as a mathematical threshold above which debt levels immediately prove unsustainable, but there is likely a psychological threshold that eventually proves insurmountable.”

The $4.5 trillion asset manager thinks debt-to-GDP is a good guidepost. When this number goes above 100%—meaning when a country takes on more debt than what it produces—it usually spells trouble.

11 countries are in this boat, including the U.S., France, Canada, and the U.K. In fact, the average debt-to-GDP ratio for the G7 countries is an eye-watering 128%, per IMF projections.

Fidelity also warns that global growth will shift into lower gear over the next two decades, meaning countries can’t rely on higher tax revenues to offset the debt—not unless they drastically raise taxes.

By its calculations, global growth will average 2.1% over 20 years, compared to 2.7% over the previous two decades.