The Covid-19 Pandemic Has Added $19.5 Trillion to Global Debt

Here Are Reasons to Be Grateful—and Worried

By Liz Capo McCormick, Craig Torres, Mathieu Benhamou and Demetrios Pogkas

Published: January 27, 2021, 6:00 AM EST | Updated: January 28, 2021, 1:20 PM EST

In the battle against Covid-19, governments around the globe are on the cusp of becoming more indebted than at any point in modern history, surpassing even World War II.

From Germany to Japan, Canada to China, fiscal authorities have spent vast sums protecting their people and defending their economies from the colossal toll of the pandemic.

At the same time corporations, emboldened by unprecedented government support for markets, are selling bonds like never before.

The borrowing binge has come with a hefty price tag—$19.5 trillion last year alone, according to Institute of International Finance estimates. Still, compared to the alternative—a deep and lasting depression—that looks cheap.

In a world where rock-bottom interest rates have kept debt costs manageable, it’s also affordable. But if rates rise faster and higher than expected, the end of the Covid-19 crisis could mark the beginning of a reckoning.

Note: Advanced economies and emerging markets are a sample of 25 and 27 countries respectively.

Source: International Monetary Fund Fiscal Monitor, October 2020

Federal Reserve Chairman Jerome Powell described it best. Huge borrowing by governments and corporations during the pandemic served as a “bridge” across the economic chasm of lockdowns, plunging consumer spending, idled cruise ships, vacant hotels, and millions of lost jobs. It allowed companies to pay the employees they didn’t fire and maintain assets in working condition. It funded jobless benefits for those who were fired, so they could pay rent and buy food.

Note: Aggregates debt of governments, households, financial and non-financial corporations for 59 key economies.

Source: Bloomberg calculations from IIF data

“Whatever the price tag is, it would be more if we didn’t do anything right away,” said Drew Matus, chief market strategist at MetLife Investment Management, which manages over $650 billion.

The bills run up in the fight against the coronavirus vary greatly from country to country. Developed nations, with easier access to capital markets, have spent more to shore up their economies, while emerging-market governments have had to do so with fewer resources.

Debt Burdens

After the pandemic broke out, public and private debt as share of GDP jumped in some of the most indebted nations

Mature economies
Emerging markets

Note: Graphic aggregates debt of governments, households and non-financial corporations for economies with a nominal GDP of over $60 billion at the end of 2020 Q3.

Source: IIF

If government borrowing is a bridge to recovery, central banks are the supports. By slashing interest rates and buying more than $5 trillion of assets, they have allowed countries to borrow at a breakneck pace.

The Fed alone has added about $3 trillion to its balance sheet over the past year, similar in magnitude to its total monetary expansion in the decade following the 2008 financial crisis.

Note: Figures converted from local currency.

Source: Data compiled by Bloomberg

With central banks providing ample support, countries by-and-large haven’t had to pay up to leverage their economies.

An analysis by Bloomberg Economics shows that even as debt for the G-7 group of advanced economies rose from 85% of gross domestic product in 2005 to 140% now, the cost of servicing that debt has fallen, from close to 2% of GDP to 1.5%. Projections out to 2030 show that for many countries, costs are expected to stay manageable.

In fact, Treasury Secretary Janet Yellen told lawmakers during her confirmation hearing this month that America’s relatively low interest burden as a share of GDP bolsters the case for even more stimulus, a sentiment even the fiercest debt hawks would struggle to disagree with.

Yet as the recovery gathers steam, the balance of risks will change. Central banks may face tough trade-offs between managing inflation and maintaining supportive policies in the years ahead. A repeat of the 2013 U.S. taper tantrum, for example, would make the debt-sustainability calculus start to look less favorable.

In an adverse scenario where U.S. borrowing costs rise 2 percentage points above current market expectations, the price tag to service the nation’s debt would jump from 2% of GDP in 2020 to nearly 6% of GDP in 2030. To put that in perspective, that’s comparable to total annual outlays for Social Security. In Italy, costs could hit 5.5% of GDP—higher than during the European sovereign debt crisis.

Among emerging markets, South Africa’s already-unsustainable debt could reach a crisis point even more quickly. India and Brazil would also face major fiscal dilemmas.

Most Sensitive

A Bloomberg Economics analysis of G7 economies and key emerging markets explores what happens to debt-servicing costs as a share of GDP based on

current market expectations

for interest rates, and with rates

1 percentage point higher

and

2 percentage points higher

Note: Figures for 2015–2020 are historical data from the IMF (World Economic Outlook, October 2020) and for 2021–2030 are Bloomberg Economics projections. Read the methodology note

Unprecedented steps by central banks have also bolstered credit markets, helping global companies sell a record $4.4 trillion of bonds in 2020.

Nearly every corner of the market was lifted, allowing struggling corporations to tap much needed financing while providing top-rated issuers access to some of the cheapest funding ever seen.

Perhaps no company was a bigger beneficiary than Boeing Co. After initially asking Washington for a $60 billion bailout for itself and its suppliers, the iconic plane maker was able to sell nearly $30 billion of bonds in 2020, bringing its net debt to $33.8 billion at the end of the third quarter and underscoring the extent government policies rebuilt confidence in credit markets.

Note: Actuals as of fiscal 2020 Q3

Sources: Company filings, data compiled by Bloomberg

While much of those fresh funds helped thousands of businesses stay afloat, the risk is that the debt overhang will force companies to divert cash from expanding their payrolls and investing in their facilities to repaying obligations, imperiling the recovery.

Ultimately, unprecedented borrowing by corporations and governments dramatically reduced the economic toll of the pandemic. Yet when the world does eventually come out the other side, it will be weighed down by larger debt burdens that could hobble growth over the longer term.

“Massive stimulus—financed by massive borrowing—is the best, indeed the only possible response to the Covid-19 recession,” said Jamie Rush, chief European economist for Bloomberg Economics. “Extremely low interest rates mean the immediate cost is basically zero. That doesn’t mean stimulus is free. Government and corporate balance sheets are now significantly more exposed to the risk of rising rates.”

Updates Debt Burdens graphic to reflect latest IIF data

With assistance from: Ben Holland, James Crombie, Dale Motyl, Andrea Niper, Dan Covello, Tom Orlik, Maeva Cousin, Felipe Hernandez, Ziad Daoud and Eliza Winger

Edited by: Boris Korby and Jeremy Scott Diamond

Note on total debt added graphic: Figures calculated from Institute of International Finance data, aggregating debt of governments, households, financial and non-financial corporations at the end of each year. Estimate for 2020 is as of January. Data is only for 10 mature economies, the Eurozone and 30 emerging economies. Data broken down by country is available through 2020 Q3 only.

Methodology note on debt sensitivity scenarios: Bloomberg Economics’ projections for net interest-to-GDP ratios are derived from their forecasts for government borrowing and nominal GDP, as well as Bloomberg data for the characteristics of debt outstanding and market expectations of interest rates. For each economy Bloomberg Economics estimates the average interest rate on the stock of debt by modelling the evolution of the debt stock in each year, dividing it into buckets based on year of issuance, duration at issuance and, for emerging markets, the currency denomination of government debt. The baseline rate paid on each bucket is then calculated using historical bond yields and projected forward using market expectations. Estimates are also adjusted to take into account inflation-linked bonds and debt issued in foreign currency. Shocks to future bond yields used in the two scenarios are designed to replicate the duration profile of movements in bond yields observed during the 2013 taper tantrum—calibrated on a 1 percentage point and 2 percentage points increase in the 10-year bond yield above the baseline. Net interest payments are then obtained by subtracting returns on assets held by the government from payments on gross debt, using historical estimates from the IMF and assuming that the return on these assets moves broadly in line with changes in bond yields. Return to the graphic

The Covid-19 Pandemic Has Added $19.5 Trillion to Global Debt

Here Are Reasons to Be Grateful—and Worried

The Great Debt Spike

Change in Total Public, Private Debt

Debt Burdens

Buying Binge

Most Sensitive

Corporate Bond Boom

Flying High