A widely tracked research has revealed that global debt increased in the first quarter to about US$305 trillion, with the rising cost of servicing the debt raising worries regarding the financial system’s leverage.

According to the Institute of International Finance – a financial services trade group, global debt increased by US$8.3 trillion in the first three months of this year compared to the end of 2022 to US$304.9 trillion, the highest quarterly reading since the first quarter of last year and the second-highest quarterly reading ever.

“Global debt is now US$45 trillion higher than its pre-pandemic level and is expected to continue increasing rapidly.”
Institute of International Finance in its quarterly Global Debt Monitor.

After peaking near 360% in 2021, IIF communicated that the debt-to-output ratio settled around 335%, above pre-pandemic levels.

Ageing populations and rising healthcare expenses, as stated by IIF researchers, continue to put fiscal strain on governments, while heightened geopolitical tensions are also expected to drive further increases in national defense spending over the medium term.

IIF’s research focused primarily on the consequences of last year’s sharp rise in interest rates on some bank balance sheets.

“Although recent bank failures appear more idiosyncratic than systemic, fear of contagion has prompted significant deposit withdrawals from US regional banks.”
Institute of International Finance

The IIF expressed worry that tighter lending standards among smaller banks might disproportionately harm some businesses and households harder.

“Given the central role of regional banks in credit intermediation in the U.S., worries about their liquidity positions could result in a sharp contraction in lending to some segments.”
Institute of International Finance

The financial services trade research group also pointed out that shadow banking, or credit intermediation from non-bank financials has also grown in popularity.

“Shadow banks now account for more than 14% of financial markets, with the majority of growth stemming from a rapid expansion of U.S. investment funds and private debt markets.”
Institute of International Finance

Specifically, the report mentioned that the “large portion” of corporate debt held by life insurance companies raises concerns over their increased exposure to less liquid assets.

Emerging Markets Experience Rise In Dollar Debt Levels

According to the research report, 75% of the IIF’s emerging market (EM) universe saw an increase in dollar debt levels in the first quarter, with the total sum crossing over US$100 trillion for the first time.

A review of the data showed that China, Mexico, Brazil, India, and Turkey saw the greatest rises.

“With the interest rate differential between EMs and mature markets diminishing, EM local currency debt is less appealing for foreign investors.”
Institute of International Finance

Some of the major emerging markets have profited from the dollar’s relative weakness, which has drawn investors to their local currency debt.

However, access to markets has been difficult or non-existent for others due to either tighter spreads when rates rose in developed countries or rapidly rising borrowing prices.