24/7 Wall St.

It is far from a secret that the United States and other nations around the world have what sounds like an insurmountable debt load. With trillions and trillions owed to creditors, total government debt has reached the equivalent of $66 trillion as of the end of 2018. Fitch Ratings released a report signaling that this $66 trillion is now almost twice as high as at the end of 2007 — and is now the equivalent of 80% of global gross domestic product.

With the U.S. debt load so large, it would be easy to assume where the blame goes. Fitch’s Global Government Debt Chart Book showed that developed markets have actually had total government debt that has been fairly stable at close to the equivalent of $50 trillion since 2012. Where the biggest gain in global debt came from is actually emerging markets. Their portion of the debt tally has risen to about $15 trillion by the end of 2018 versus about $10 trillion in 2012.

Not all emerging markets are the same. Fitch further showed that the Middle East and North Africa saw spikes of more than 100% in this short time, and Sub-Saharan Africa has seen its government debt rise by 75%. While these figures sound alarming, Fitch did note that these regions still have relatively low debt loads at less than $1 trillion each.

Not all nations are equal when it comes to credit ratings. Fitch rates only 11 sovereigns with ‘AAA’ ratings and those 11 nations account for about 40% of all government debt. Fitch also described that as being virtually unchanged over the last two decades. Some 93% of global government debt also carries an investment grade rating of ‘BBB-‘ or higher.

The United States is, of course, the real king of debt in absolute dollar terms. Its consolidated general government obligations were listed as being close to $21 trillion at the end of 2018. Also worth noting is that the US debt load is rising by roughly $1 trillion per year.

Asia ranks high in debt as well. Fitch pointed out that Japan is the second highest on the list of government debt at $12 trillion, followed by China with roughly $6 trillion in debt.

Over in Europe, the formal numbers are far lower per nation. The total government debts of Germany, France, Italy, and the United Kingdom were each in the range of $2.4 trillion to $2.7 trillion by the end of 2018.

While his report might not point out much for solutions, one issue that has kept the governmental debt load from rising even higher has been the observance of lower interest rates that governments have to pay in debt servicing costs even as there has been a steady deterioration in the credit quality of government debt in recent years.

James McCormack, Global Head of Sovereign Ratings at Fitch has said:

Government debt levels are high, leaving many countries poorly positioned for financial tightening as global interest rates begin to move higher… In 2018 there were more upgrades than downgrades but, based on where we have negative rating outlooks, we believe 2019 looks less favourable, especially for the Latin America and Middle East and Africa regions.

McCormack also noted on global government debt:

Common themes that have driven sovereign ratings in the last few years will dominate again in 2019, including tightening sovereign financing conditions, commodity price fluctuations and political and geopolitical developments. Slowing economic growth in some countries may bring fiscal concerns back to the fore, particularly given the high starting positions with respect to government debt.

While this report is based on the end of 2018, the look ahead into 2019 and beyond should come with some warnings. The U.S. is a $20 trillion economy in annual GDP, but its economic numbers are slowing amid trade issues with China and now that interest rates have been raised multiple times. Europe is wanting to end its endless quest in quantitative easing with buying up all of Europe’s debt, and it would like to begin to end its negative or zero interest rate policies. China is likely to be taking on more debt as it tries to further stimulate its economic growth.

For a reference on the government debt load of the entire planet, the World Economic Forum put the global GDP tally for 2017 (the most recent year available) at about $80 trillion. And the top 10 nations accounted for about two-thirds of that GDP figure.

Sadly, this article is a likely just prelude to what may be in store in just a few years. We might be writing about the world’s government debt nearing $100 trillion much sooner than any of us might think.

24/7 Wall St.
Why Chinese Investments in US Have Tumbled 90% in Just 2 Years