The International Monetary Fund (IMF) predicts that global public debt will reach more than $100 trillion by the end of the year, or 93% of global GDP, and will reach 100% by the end of the decade.
International Monetary Fund Annual Meeting in Washington, 2022 [AP Photo/Patrick Semansky]
These forecasts, presented in a summary of the fiscal surveillance report prepared for next week’s IMF and World Bank meetings, clearly show that stabilizing debt levels in countries where they are growing fastest will require cuts in public spending on a scale not seen in the past.
The increase in debt levels is accelerating, having increased by 10 percentage points relative to global GDP since 2019, before the pandemic hit.
Although the summary indicates that in some countries debt levels are stabilizing (around two thirds of the total), they will nevertheless remain “well above the levels observed before the pandemic”.
But, highlighting the scale of the problem, he continues: “Countries where debt stabilization is not expected represent more than half of global debt and around two-thirds of global GDP. »
These include the United States, United Kingdom, Brazil, France, Italy and South Africa. The report calls for immediate action, saying any delay “will make the necessary adjustment even more important.”
Although not directly addressed in the report’s summary, this crisis is centered on the United States, where the public debt is quickly approaching $36 trillion and one in seven dollars goes solely to paying interest on debts. previous ones.
The IMF called for urgent action.
“Waiting is risky: country experience shows that high debt can trigger negative market reactions and limit fiscal space in the face of negative shocks. »
In summary, the longer the measures that the IMF deems necessary are taken to be implemented, the greater the danger of a financial crisis.
The scale of the reduction recommended by the IMF is unprecedented.
A “cumulative fiscal adjustment” – a euphemism for continued reductions in public spending – amounting to 3.0-4.5% of GDP would be needed to stabilize or reduce debt, according to the IMF.
“The scale of fiscal adjustment needed is higher than currently projected, and almost twice as large as past adjustments, particularly in countries where debt is not expected to stabilize. »
In other words, the kind of cuts in public spending that the IMF says must now be made will dwarf previous cuts to vital social services such as health, education and income support.
As is often the case, the IMF report attempted to disguise its prescriptions by referring to the need to maintain social security needs and preserve public investments in order to limit the negative impact on production.
It refers to a gradual but sustained adjustment that would “balance debt vulnerabilities with maintaining strong private demand” and warns that “accelerated consolidation” would require “politically unfeasible increases in debt rates.” taxation as well as spending reductions.”
However, the next sentence from the report contradicts this assessment of a gradual reduction.
It states that “economies at high risk of debt distress”, i.e. some of the world’s largest economies, and “those that have lost market access”, i.e. some of the poorest where, at present, interest payments alone already exceed spending on areas such as health and education, must be subject to “front-end adjustment” .
In other words, debt adjustment must begin with a frontal attack on spending.
The publication of the summary of the report well before the opening of the meeting, contrary to the usual practice of biannual conferences, shows that the IMF considers the issue of public debt a key priority.
He notes that “past experience suggests that debt projections tend to underestimate actual outcomes by quite a significant margin. Debt-to-GDP ratios achieved five years later can be 10 percentage points of GDP higher on average than projected.”
The IMF said a new “debt at risk” model showed that “in a very adverse scenario, global public debt could reach 115% of GDP in three years, almost 20 percentage points higher than what is currently projected.
And to underline the need for urgent action, the blog specifies that if the public debt is in reality higher than it appears, “current budgetary efforts are probably lower than what is necessary”.
This point is highlighted in the summary, which states that “risks to the debt outlook are strongly tilted to the downside and much larger fiscal adjustments than currently planned are required.”
Risk factors identified by the IMF include lower economic growth, tighter financing conditions, economic and political uncertainty, and the fallout from “greater political uncertainty in systematically important countries, such as the United States.” United.”
The report also highlights the existence of “considerable unidentified debt” resulting from losses suffered by state-owned enterprises, which increased sharply during periods of financial stress.
The public debt crisis is part of a process that extends to the entire economy and its financial system and which has been created by the ability of banks and financial institutions to gorge themselves on money ultra cheap provided by the world’s major central banks between 2008 and 2022, when interest rates were raised.
In a commentary published Thursday in the Financial Times under the title “The Great Wall of Debt”, Michael Howell, managing director of the London-based company Crossborder Capital, writes that “we are already walking on the foothills of a new crisis”.
According to him, next year and in 2026, investors will have to face the problem of refinancing debt contracted when interest rates were at their lowest.
“Similar refinancing stresses have helped trigger several financial collapses in the past, such as the Asian crisis of 1997-98 and the financial crisis of 2008-2009. »
Howell questioned what he called the “standard textbook argument” that capital markets are mechanisms for financing productive investment spending. This was not the case and “under the current weight of global debt, estimated by the Institute of International Finance at $335 trillion in the first quarter, they have transformed into enormous debt refinancing mechanisms” .
In a world dominated by debt refinancing, he continues, around three out of four financial market transactions simply refinance existing debts. This means that “nearly $50 trillion of global debt must be renewed on average each year.”
Debt figures – public and private – have broad economic and political implications. They signify a deepening crisis of global capitalism for which the ruling classes have no other solution than war for markets and profits, combined with deeper and deeper attacks on the working class, carried out with the strength of the capitalist state.
For the working class, this crisis underlines the imperative of a political struggle for socialism, that is, the struggle to take political power into their own hands in order to carry out the complete reorganization of the economy.
(Article published in English on October 18, 2024)
