Last Updated: January 19, 2023, 10:39 IST
During the Covid-19 pandemic, countries all over the world suffered from a severe financial crunch. Both developing and underdeveloped countries borrowed funds from financial institutions and developed nations. On the other hand, developed countries like the US, France, and Canada used their reserved funds. A report presented by The Institute of International Finance reveals a stark reality of the global economy. The report states that the global economy owes a debt of 349% in 2023, a major increase from 102% in 2022.
The total debt is the culmination of loans taken by households, corporations, and governments across the world. If this debt burden is divided among global citizens, each of us has to pay a sum of Rs 37,500. In another report by S&P Global Ratings, lead observers Terry Chan and Aleksandra Dimitrijevic opine that the global demand for debt continues to grow to support inflation, infrastructure, and climate change.
In the report, they mentioned that “rising interest rates and slowing and falling economies are results of increasing debt burden.” In 2022, Fed funds and European Central Bank rates observed an increase by an average of 3 per cent. This has resulted in an increase of $3 trillion in interest expense.
According to the analysis, after 2007, each additional dollar borrowed resulted in less value being added to the economy. This indicates that governments and businesses with poor credit ratings are affected by rising interest rates. However, the rising costs of credit cards, mortgages, and vehicle loans are a problem for low-income households.
According to market observers, the debt load and likelihood of a recession will rise if the Central Bank keeps raising its interest rate. It also gets more expensive for businesses to take out loans when the yield on government debt rises. The impact of rising interest rates is felt by businesses in the US, who then raise prices and reduce spending as a result. The price of stocks is also impacted by rising interest rates. The S&P 500 dropped by over 20% in 2022 as a result of the Federal Reserve’s rate increase.
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