Is a Global debt crisis

coming?

By: Renee Williams

 What is debt?

Debt is when one party borrows from another, this

allows individuals to be able to buy something they
wouldn’t normally be able to afford.
The cost of debt is the interest rate.
At present interest rates has been historically low
worldwide and this created cheap borrowing for
business and consumers.
 Worldwide debt

Total worldwide debt has never been higher and there

is little sign of the current wave retreating anytime
soon.
When covid was declared a pandemic governments
announced hundreds of billions of stimulus packages
that sent debt even higher.
Global borrowing has been increasing rapidly
 Worldwide debt cont'd

International finance estimates total worldwide debt

is made up of borrowings from households, companies
and governments and came up to 253 trillion at the end
of September 2019.
This works out to be 32 500 debt per person worldwide,
and this figure is believed to only increase.
We should be worried about the scale of this debt
wave, the world bank has urged countries around the
world to make it their primary concern.
 Sovereign debt

Sovereign debt is how much a government owes.

Governments take debt and use it to stimulate the
economy through infrastructure projects, social
programs and more.
A country can fall behind on its debt obligations and
default.
This isn’t common but has happened. For example
Lebanon 2020, Argentina in 2001 & Russia in 1998
 The four waves of debt accumulation

- First wave: occurred in Latin America

Caused by:
- Borrowing excessive amounts from US commercial banks and other
creditors.
- Interest rates were low
Characteristics
- Loans were taken for development purposes and their economy was
flourishing
- However the debt wave was rising in the background
- In the 80s economies began rescheduling there increasing IRs as
they fought inflation.
 First wave cont'd

Start of crisis:
- 1982 was the start of the debt crisis as Mexico
indicated they would not be able to finance its
debt.
- Many economies had to devalue their currency to
keep exporting industries competitive as they faced
an economic downturn.
- 16 countries in Latin America had to reschedule
their debts
 Second wave

Second wave occurred in advanced economies 1990-2001

Causes:
- Debt accumulation in the private sector played a more
dominant role.
- In the early 90s many advanced economies deregulated their
financial markets (massive surge of capital into emerging
markets with falling IRs)
Characteristics:
- Developed economies started racking up tons of debt, this
went unnoticed as GDP was growing rapidly alongside the debt
and the ratio between the two stayed consistent.
 Second Wave cont’d

- Most of the debt was also hidden by the private

sector.
Start of the crisis
- The currency crisis in Mexico in 1994 pushed
international investors back into panic mode with
the US and IMF funding they were able to avoid
default this time.
 Third wave
Third wave occurred in Europe & Central Asia 2002-2009

Causes:

- Us removed barriers between commercial and investment

banks while the EU encouraged cross border connections
between lenders.

Characteristics:

- This paved the way for mega banks. These banks led to
increase private sector borrowing particularly in Europe
and Central Asia

Start of crisis: US 2009 depression was so severe that

output sank to its lowest level since the great depression.
 Fourth wave?

The world bank indicated we are currently in the midst

of the fourth wave of global debt and if history
repetition is to be avoided governments must make debt
management and transparency top priority.
It is said to share many characteristics with the last
3 waves such as:
Prolonged periods of Low IR Change in Financial
landscape Which encourages more borrowing.
The fourth is said to be the largest growing of them all.
 In conclusion

“As covid attempts to sink the world economy the moment for
stemming the tide has passed.”
This statement basically translates to say that covid is
severely impacting countries economic, health and livelihood
stability. In relation to debt, the time for which economies
were to pull their reigns and stop borrow has passed, and
some are in too much debt now to stop. For example the US,
which is the country with the largest debt worldwide.
Answering the question - Is the global debt crisis coming?

As indicated earlier on in the presentation the, we

are currently in the midst of the fourth debt wave.
It is the largest and fastest growing.
The global debt crisis is not coming but is already
here, it just has not become severe enough for
countries to default and notice they are currently
in the midst of the crisis.
With the covid pandemic still present, debt has only
increased and shows little signs of slowing once
this pandemic is ongoing.
 References

Belsie, L. (2010, April 4). Growth in a Time of Debt. NBER. https://www.nber.org/digest/apr10/growth-time-debt

Bhatt, V. (2018, September 3). Re-Thinking Debt Burden: Going with the Flow? Eastern Economic Journal.

https://link.springer.com/article/10.1057/s41302-018-0113-x?error=cookies_not_supported&code=3b20bb

bc-a3eb-440a-8a20-8d9c99742d9b

CNBC International. (2020, March 26). Is a global debt crisis coming? | CNBC Explains. YouTube.

https://www.youtube.com/watch?v=_Cf7o_YlH5M