The wealthier nations printed money and went in for heavy QE to meet their funding needs. Developing economies did it their way, but the problems are mounting. Image Credit: Shutterstock

The growing public debt crisis poses a significant threat to the global economy, as it doubles at an alarming rate and with no immediate solutions in sight. The geopolitical changes associated with this economic crisis are exacerbating the issue, which is not confined to less developed countries but developed ones too.

Many of these countries had become too reliant on loans to manage their short-term needs, and which then became a habit as each new economic challenges struck. According to the IMF and the Institute of International Finance, there has been a significant increase in the volume of public debt, which in 2020 was $226 trillion, and by the end of last year had risen to $303 trillion, a 34 per cent increase. Of this, $121.2 trillion (or 40 per cent) was sovereign debt, which is equivalent to 119.3 per cent of the global GDP of $101.6 trillion in 2022.

Unsustainable appetite for debt

The significant increase over the past two years can be attributed to various factors. The pandemic has played a crucial role in driving up public debt, along with the more recent high interest rates, wars and conflicts. These resulted in higher inflation rates, increased borrowing to cover deficits, and a surge in military expenditures and import financing.

Different countries have adopted varying approaches to address the issue. Developed nations have tended to stand in solidarity with one another, as seen in the cases of Greece and Italy, where the European Central Bank and the IMF intervened to prevent their collapse. Developed countries have access to tools that are not available to others, such as printing money or quantitative easing, which can help alleviate the crisis.

For instance, the US has a public debt volume of $31 trillion in 2022, representing 124 per cent of GDP. The US printed its way to more than $9 trillion, a tactic also employed by the European Union, China, and Japan.

Unfortunately, the crucial tool of printing money or quantitative easing is not available to least developed countries, exacerbating their financial crises and sinking them deeper into the quagmire of debt. In fact, 60 per cent of these countries are unable to meet their debt obligations, as Ethiopian Prime Minister Abiy Ahmed stated last week: “Ethiopia is unable to meet its loan obligations.”

A full-blown crisis of payments

Some countries, such as Sri Lanka, have even become unable to cover the costs of servicing their debts. China recently postponed Sri Lanka’s debt obligations to help alleviate the situation.

While printing money or QE has helped developed countries temporarily manage the public debt crises, it is not a sustainable solution. The next crisis is likely to be of a global nature, as the inability of a group of nations to pay their debts can drag the rest of the world down due to the strong interdependence between all components of the financial system.

The ball of heavy debt would then roll and trigger a new financial crisis, for several reasons. One such is that global GDP does not cover the volume of sovereign debt, let alone the rapidly growing volume of public debt, which includes the private sector and individual debt.

A simmering problem

Regrettably, there are no indications of a possible exit from the crisis, neither at the level of developing countries nor of the developed. The latter will find themselves unable to continue with QE policies due to economic consequences, such as higher inflation and currency exchange volatility linked to living standards and wages.

Poorer countries will be in an even worse situation as their annual budget deficits will increase, and they will not be able to finance imports, even of food, leading to the collapse of their economies with serious social repercussions.

Hence, the public debt crisis is an issue that affects all, and it cannot be attributed to a particular group of countries, despite the differences in how they approach this problem. The question is not whether the debt bubble will burst or not, but when. And potentially leading the global economy into a long and unprecedented crisis.