Global debt crisis unlikely in the near term, even as more defaults loom, report says

Melbourne, Australia, March 10, 2021 / PRNewswire / – (S&P Global Ratings) – As global debt-to-GDP ratio hits record highs, continued global economic recovery will likely prevent a debt crisis anytime soon, S&P Global Ratings said in his report “Global Debt Leverage: Short-Term Crisis Unlikely, Even With More Debt Defaults Looming, published March 10.

Global debt to GDP has been increasing for many years; the pandemic has only exacerbated the trend. As global debt hits an (estimated) record 201 trillion dollars at the end of last year – which equates to 267% of GDP – we expect it to drop to 258% by the end of this year before stabilizing at around

255% -256% in 2022-2023. Naturally, the shape of the post-pandemic recovery will take into account how much and how quickly businesses, governments and households can reduce their debt, if at all.

We forecast real global GDP growth of 5.0% in 2021, 4.0% in 2022 and 3.6% in 2023. The recovery hinges on successful vaccine deployment, availability of credit and spending adjustments and borrowing patterns by businesses, governments and households.

Either way, higher overall leverage means higher risk of default. S&P Global Ratings believes that payment defaults could reach levels not seen since 2009. In addition, heavy corporate debt could delay the resumption of credit measures beyond 2022 for hard-hit sectors, such as airlines. and recreation.

Our basic expectation is that the 12-month US speculative-grade corporate default rate will slide to 7% by year-end, from 6.6 december 2020. For Europe, the equivalent expectation is

6.5%, compared to 5.3%. Risks to our baseline scenario include disorderly reflation, a hike in policy rates or even wider credit spreads, the spread of more potent COVID-19 strains, low vaccine uptake, and consumer demand rebounding less than expected. due to lags.

The government’s monetary and fiscal policies have supported the prices of financial and real assets. As we expect policy rates to remain low, creditors fearing inflation or reacting to an unexpected adverse event could reset risk-return expectations, resulting in higher debt servicing costs and higher debt service costs. reduced accessibility to financing. Interest rates are already starting to normalize as the COVID recovery accelerates.

“A normalization of interest rates due to a strong recovery in COVID is natural,” said Terence Chan, senior researcher at S&P Global Ratings. “That said, the speed and volatility of the path to normalization is more of a concern.”

The recent surge in long-term US nominal yields has been notable. A gradual rise in real yields might simply reflect an improvement in confidence in the economic outlook (inflation expectations would seem to imply the same). Credit spreads can increase as real returns rise, but again, that might just mean more confidence in the future.

Nonetheless, the markets have shown a tendency to react strongly to the withdrawal of stimulus measures, and this point can be approximated by the recovery implicit in the rise in yields. A quick and volatile reset of investor risk-return expectations could lead to a sharp revaluation of financial and real assets, higher debt-servicing costs (hanging out with borrowers who thought rates would be ‘lower for longer’) and a drying up of accessibility to financing for some borrowers.

This report does not constitute a rating action.


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