Global debt reaches a record $226 trillion, and the IMF is concerned about sustainability risks from rising interest rates

The International Monetary Fund said global debt soared to a record $226 trillion last year, raising concerns about debt sustainability as interest rates rose.

IMF officials said in a note Wednesday that a faster-than-expected rate hike could put pressure on highly indebted countries and force governments and businesses to cut debt and spending, hurting economic growth.

Citing the IMF's latest global debt database, they said the global debt/GDP ratio rose by 28 percentage points to 256 percent in 2020, the biggest increase since World War II.

Fiscal policy usually adjusts as interest rates rise because the government has to take more money to pay off its debts and cut spending to keep the deficit under control.

"If global interest rates rise faster than expected and economic growth slows, then the risks will be magnified," WROTE IMF officials led by Vitor Gaspar. "If both the public and private sectors are forced to deleverage at the same time, growth prospects will be affected."

Last year, public debt in advanced economies soared as governments rolled out massive fiscal stimulus in response to the Covid-19 pandemic. The researchers say the soaring debt ratios of emerging economies and low-income countries are due to a significant decline in nominal GDP.

Government debt will account for just over half of global debt growth in 2020, and the global public debt/GDP ratio will jump to a record high of 99 percent, the report said.

According to the IMF, the government debt/GDP ratio in advanced economies soared from around 70 percent in 2007 to 124 percent in 2020; private sector debt growth in these economies has been more moderate, rising from just 164 percent to 178 percent of GDP.

This article originated from the financial world