While countries such as the US account for a significant chunk of this new debt, every country that the group looked at saw borrowing rise over the year. China alone saw debt rise $650 billion, the largest increase of any country in cash terms. Among the major developed markets, Germany saw the biggest increase in percentage terms, with borrowing rising by one seventh (+14.7%), twice the pace of the global average.
The report showed that debt servicing costs remained relatively low with the effective interest rate on all the world’s government debt just 1.6%, down from 1.8% in 2020. However, this burden is set to rise just at the point when citizens are looking to their governments to support them through a difficult period. The global interest burden is set to rise by around one seventh on a constant-currency basis (14.5%) to $1,160bn in 2022. The worst hit country? The UK – with higher inflation raising the cost of index-linked debt, combined with the cost of unwinding the quantitative easing (QE) programme. No wonder Rishi Sunak wasn’t feeling generous in the latest budget.
What does this mean for investors? It may mean that rates will stay lower. While most central banks are independent, they will take account of the impact of raising rates on economic growth. If it looks like higher rates will push borrowing costs higher and stymy government spending, they may think twice before driving rates up.
It also means there is less fiscal headroom to support economic growth. The political pressures on public purses have never been higher. The tragedy in Ukraine may pressure Western governments to borrow more to fund increased defence spending. The move to net zero will be a significant upfront expense, while governments also need to pay back furlough spending from the pandemic. This leaves little room to support citizens through the unfolding cost of living crisis. Being the Chancellor or its international equivalent is likely to be a thankless task in the years ahead.