OECD: Global debt surpasses $100 trillion due to rising interest rates

The OECD reported on Thursday that outstanding government and corporate debt globally exceeded $100 trillion in 2012. Rising interest rates have forced borrowers to make tough decisions and prioritise investments.

Although central banks have cut interest rates, borrowing costs remain higher than they were before the rate hikes of 2022. Low-rate debt continues to be replaced, and interest costs will likely rise in the future.

This comes at a moment when governments are facing large spending bills. This week, the German parliament approved a massive infrastructure plan that will support an broader European defense spending push. Major economies are facing long-term costs due to the green transformation and an ageing population.

In its annual report on debt, the Organisation for Economic Co-operation and Development stated that "This combination is higher costs and greater debt risk restricting future borrowing capacity at a moment when investment needs are more than ever."

Interest costs as a percentage of output increased from the lowest in 20 years to the highest between 2021 and 2024.

The report stated that interest rates are below market rates in over half of OECD nations and almost a third of emerging markets government debt. They are also lower for less than two-thirds of high grade corporate debts and more than three quarters for junk corporate debts.

By 2027, almost half of government debt in OECD and emerging market countries as well as a third of debt held by corporations will be paid off.

The organisation stated that low-income and high-risk countries are at the greatest risk of refinancing, as more than half of their debt is due to mature in the next three year's time, including 20% this year.

Serdar Celik, OECD's head of capital markets, financial institutions and corporate finance, said that as debt costs increase, companies and governments need to make sure their borrowing is a source of long-term productivity and growth.

We are not concerned if they do it that way. "If they don't, we will face more difficult times. If it increases the cost of debt without increasing the productivity capacity of the economic system, then it is not worth it."

The OECD reported that companies have increased their borrowings since 2008, mainly for financial reasons such as refinancings and shareholder payouts. However, corporate investment has decreased since 2008.

The OECD has said that emerging markets that rely on borrowing in foreign currencies need to develop local capital markets. The report revealed that borrowing costs through dollar-denominated debt had increased from around 4% to over 6% by 2024. They rose to more than 8 percent for nations with higher risk and lower-rated economies. These nations struggled to access domestic cash pools due to their low savings rates and small domestic markets.

TENSIONS GEOPOLITICAL

The OECD stated that funding the transition to net-zero emission was "an immense challenge".

If the extra investments required for the transition were financed by the public, the debt-to GDP ratios in advanced economies could be 25 points higher and in China 41 points higher by 2050. If the debt of energy companies in emerging markets outside China were to be funded privately, it would have to quadruple before 2035.

The OECD reported that foreign investors and households have replaced central banks in reducing their bond holdings. They now represent 34% and 11% respectively of the domestic government debt of OECD countries, up from 29% a 5% in 2020.

It warned that these dynamics might not continue.

The OECD warned that rising geopolitical tensions, coupled with trade uncertainty, could cause a rapid shift in risk aversion. This could disrupt portfolio flows internationally.

(source: Reuters)