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Global Debt: A Tale of Varying Sensitivity to Interest Rates and Debt Structures

ECONOMYGlobal Debt: A Tale of Varying Sensitivity to Interest Rates and Debt Structures

DEBT: Global trends in debt are consequential, and current levels are exceptionally high. Significant differences exist, however, between the debt segments of governments, companies, or households with varying sensitivity to interest rate changes (considering duration and variable versus fixed interest rates). There is also a stark divide between those who borrow from banks or bond markets. This helps justify the robust slowdown in growth in Europe this year compared to improved performance in the US, as well as explaining China’s actions in restricting the property sector versus the surprising macroeconomic resilience in emerging markets. It also raises a major question over Japan, which is beginning to raise interest rates for the first time in 15 years while having the highest level of national debt in the world.

GLOBALLY: The sum of global debt among households, businesses, and governments is nearly $250 trillion, equivalent to 250 percent of global GDP. The long-term trend is for relentlessly increasing debt, driven by chronically large government deficits in developed markets and China’s property needs. In recent decades, the share of public debt in global GDP has tripled, while China accounts for 30 percent of all global corporate debt. However, in the near term, debt levels have stabilized and sharply declined as a share of GDP. This has happened because rising inflation has increased nominal GDP and reduced debt burden in terms of fixed costs.

COUNTRY: The structure of debt matters and varies by country. Debt levels in Japan seem astronomical but are concentrated on the government and are supported by consumers with an overly low level of debt. In contrast, the government and households in China are lightly indebted, but corporations there are the most indebted in the world. Consumers in the United States and United Kingdom are among the most indebted globally and – without surprise – dominate in the economy, while European governments and businesses are more indebted than their American counterparts. Finally, a large part of the recent relative resilience of emerging markets can be explained by their low level of debt, concentrated in local currency, not US dollars

Ben Laidler, eToro

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