Global Debt

27 Sep Global Debt

This article covers “Daily Current Affairs” and the topic details “Global Debt”. This topic has relevance in the “Economy” section of the UPSC CSE exam.

For Prelims:

What is Global Debt? 

For Mains:

GS3:  Economy

What are the reasons and impact of Global Debt? 

Why in the news?

According to the Institute of International Finance (IIF) report, global debt saw a significant increase, reaching an unprecedented tally of $307 trillion by the end of June 2023.

Understanding Global Debt

• Global debt is the total outstanding financial obligations or liabilities owed by governments, businesses, and individuals worldwide. 
• This debt can take various forms, including government bonds, corporate bonds, bank loans, mortgages, and consumer debt, such as credit card debt. 
• Governments resort to borrowing to finance expenditures that exceed their tax revenues and other sources of income. They may also borrow to cover interest payments on previous loans used to fund past expenses. 
• On the other hand, the private sector extensively borrows funds primarily for investment purposes.

Reasons for the increasing levels of global debt:

• Rising interest rates: 

• • As interest rates increase, it becomes more expensive for governments, businesses, and individuals to borrow money, leading to a higher debt accumulation.

• Increase in savings and investments: 

• • A rise in the overall savings within an economy can contribute to an increase in debt levels. 

• • When individuals and businesses have more savings, they are more likely to invest or make purchases, often requiring borrowing.

• Government expenditures and deficits: 

• • Governments often borrow to finance various expenditures, such as infrastructure projects, social welfare programs, and defence spending. 

• • When governments spend more than they collect in taxes and revenues, they rely on borrowing to cover the deficit.

• Economic downturns and recessions: 

• • During an economic slowdown or recession, governments and central banks may implement expansionary fiscal and monetary policies, such as increased government spending or lower interest rates, to stimulate economic growth. 

• Financial crises and bailouts: 

• • Episodes like the 2008 global financial crisis and subsequent bailouts of financial institutions can significantly contribute to the increase in global debt. 

• • In times of crisis, governments often provide financial support to prevent systemic collapses, which adds to their debt burden.

• Currency Depreciation: 

• • The emerging market economies, such as China, India and Brazil, have also experienced currency depreciation against major currencies, such as the U.S. dollar.

• • This has increased the cost of servicing their foreign currency-denominated debt.

Concerns regarding increasing Global Debt: 

• Debt Sustainability: 
  • Excessive government debt, fueled by reckless borrowing for populist programs, can become unsustainable in the long run. 
  • When interest rates rise, debt servicing becomes more challenging, especially for heavily indebted governments.
• Risks of Rising Interest Rates: 
  • While low interest rates have made debt management easier, increasing rates can create pressure for governments to meet their debt obligations. 
  • This may result in defaults or inflationary measures to alleviate the debt burden.
• Inflationary Pressures: 
  • Governments may ” inflate away” their debt by creating new currency to pay off outstanding government debt. 
  • However, this can lead to inflation, effectively imposing an indirect tax on the economy to address the debt.
• Concerns about Private Sector Debt: 
  • Rapidly rising private debt levels, unsupported by genuine savings, can lead to unsustainable booms that may culminate in economic crises. 
  • The 2008 global financial crisis serves as a reminder of the risks associated with excessive private debt.
• Vulnerability to Financial Crises: 
  • Higher debt levels increase the vulnerability of economies to financial crises. When debt becomes unsustainable, an economic shock or downturn can trigger a crisis, leading to recession, banking sector instability, and a contraction in economic activity.

As countries navigate the challenges of increasing debt burdens, effective debt management and long-term fiscal policies are essential for safeguarding economic stability and promoting sustainable prosperity.

Sources: What are the reasons for the rise in global debt? 

Download plutus ias current affairs eng med 27th Sep 2023

Q1. With reference Global Debt, consider the following statements: 

1. Global debt is the total amount of money that governments around the world owe to others.
2. Rising interest rates can contribute to an increase in global debt as it becomes more expensive to borrow money.
3. An economic downturn or recession leads to decreased global debt as governments implement policies to reduce borrowing.

Which of the statements given above is/are correct?

(a) 1 and 2 only

(b) 2 only

(c) 3 only 

(d) None 

Check Answer

Q2. Consider the following statements: 

1. Excessive government debt can become unsustainable when interest rates rise, and debt servicing becomes challenging.
2. Currency appreciation in emerging market economies reduces the cost of servicing their foreign currency-denominated debt. 
3. Governments primarily borrow to invest in the private sector.

How many of the abovementioned statements are correct?

(a) Only one 

(b) Only two 

(c) All three 

(d) None

Check Answer

Q3. Discuss the causes and consequences of the surge in global debt in recent years. Suggest measures to address the challenges posed by rising global debt and ensure sustainable economic growth.

Gaurav N