[The End of the 'Chip Money' Era] Debt Bills Arrive... Global Interest Bomb Hits $16 Trillion

Increased Debt Due to Low Interest Rates, 353% of Global GDP
Last Year's Interest Costs $10 Trillion... Expected to Exceed $16 Trillion by 2026

[Asia Economy New York=Special Correspondent Joselgina, Reporter Lee Hyunwoo] As the era of low interest rates comes to an end, countries around the world are now facing the moment to pay the largest debt bills in history. With central banks signaling a domino effect of interest rate hikes, the interest bomb is about to drop immediately.

Last year, the global household, corporate, and government sectors paid approximately $10 trillion (about 11,991 trillion KRW) in debt-related interest costs. Considering the recent trend of rate hikes, it is expected to exceed $16 trillion (about 19,164 trillion KRW) by 2026.

◇ Increased Debt in the Chip Money Era... South Korea’s Household Debt Burden Ranks in the Top 5 Worldwide

According to the International Institute of Finance (IIF) and others as of the first half of 2021, the global debt scale stands at $296 trillion (about 35,505.2 trillion KRW). This is 3.56 times the $83 trillion recorded in 2000. It is twice the growth rate of the global gross domestic product (GDP) during the same period.

The global debt-to-GDP ratio also surged from 230% in 2000 to 320% just before the pandemic, and further to 353% in the first half of last year. The British economic weekly The Economist reported, "The world economy has never been this indebted," attributing it to "the prolonged era of ultra-low and low interest rates over the past 20 years." Corporations borrowed money cheaply, significantly increasing their debt, and governments worldwide supported their economies by injecting additional fiscal spending amid the unprecedented pandemic.

According to The Economist, the total interest paid globally by households, corporations, financial institutions, and governments on debt last year is estimated at about $10.2 trillion. This amount corresponds to a staggering 12% of the global GDP paid as interest on debt.

Assuming that interest rates in 58 countries rise by 1.0 percentage point over the next three years, interest costs in 2026 are expected to reach $16 trillion, equivalent to 15% of GDP. The Economist noted, "If inflation persists, central banks worldwide will take more aggressive measures, potentially causing interest rates to rise faster," adding, "Interest payments could reach $20 trillion, about one-fifth of the global GDP."

With the end of the low-interest era, rapid interest rate hikes in the future will inevitably deal a direct blow to economies with large external debts. This is because capital outflows abroad, as well as principal and interest repayment burdens, will increase.

In particular, South Korea is considered one of the countries with a serious household debt problem. According to an analysis by The Economist of 45 countries worldwide, South Korea ranks among the top five countries with severe household debt relative to income, alongside Switzerland, Norway, Sweden, and Australia. Government debt is most severe in Lebanon, Nigeria, Greece, the United Kingdom, and China, in that order. Corporate debt is particularly serious in France, Sweden, Switzerland, Norway, and the United States.

◇ Central Banks Accelerate Tightening... Russia and Mexico Likely to Raise Rates This Week

Major central banks are bidding farewell to the era of liquidity. Some emerging countries, hit hard by severe inflation due to the COVID-19 pandemic, have already embarked on steep interest rate hikes since last year. JP Morgan Chase stated, "Countries that have raised rates so far account for about 5% of the global GDP," adding, "By April, this proportion is expected to increase to about half."

Mexico, which has a monetary policy meeting scheduled for the 10th, is expected to raise its benchmark interest rate by an additional 0.5 percentage points from the current 5.5%. On the following day, the 11th, the Russian central bank is forecasted to raise rates by 1 percentage point.

The signals for rate hikes from major advanced economies that have maintained low interest rates have also intensified. Following the U.S. Federal Reserve’s indication of a rate hike in March to curb inflation at its highest level in about 40 years, the European Central Bank (ECB), which has maintained a zero interest rate policy since 2016, also hinted at a possible rate increase within the year.

Class Knot, Governor of the Netherlands Central Bank and ECB Executive Board member, appeared on the Dutch current affairs program Buitenhof and stated, "I expect the ECB to start raising rates by 0.25 percentage points as early as the fourth quarter of this year," adding, "The second rate hike will take place in spring next year." This is the first time an ECB Executive Board member has publicly announced a rate hike prospect within the year.

Aditiya Bihab, an economist at Bank of America (BoA), said, "The situation has changed," adding, "Central banks worldwide have started raising interest rates amid severe inflation and have begun balance sheet reductions."

Meanwhile, Brazil has raised its benchmark interest rate eight times since March last year, reaching 10.75%. Chile raised its benchmark rate by 1.5 percentage points to 5.5% last month, marking the largest increase in 20 years.

This content was produced with the assistance of AI translation services.