Historically High Debt Beginning To Feel Credit Crunch From Higher Interest Rates
September 5, 2023—As world leaders travel to New Delhi, India for the G20 Summit, the head of an international body monitoring global finance issued a stark warning about debt and stability. In short, interest rate hikes since March 2022 are beginning to impact markets, according to Klaas Knot, a Dutch economist and chair of the Financial Stability Board.
‘Historically High Debt’
Writing on behalf of the board, Knot warned that a combination of factors could “impair the capacity of borrowers to service the historically high stock of outstanding global debt.”
Those factors include high global debt, interest rate hikes, persistent inflation, tighter financial markets, and a slowing economy, according to FSB’s Chair’s September 5 letter. Furthermore, they are taking place as the global economy is undergoing “deep structural change” due to the digitization of finance, cryptocurrency, and climate risks.
Risks In Banking And Housing
Knot noted the banking sector has overcome shocks felt earlier this year when several banks underwent turmoil. He said FSB is planning to put forward recommendations for an international resolution framework for the financial sector.
Although the housing market has sustained interest rate hikes relatively easily to date, seeing both dips and gains this year, the real estate sector is vulnerable, FSB warned.
“The global economic recovery is losing momentum, and the effects of the rise in interest rates
in major economies are increasingly being felt,” Knot wrote. “So far, the global financial system has remained resilient overall, not least thanks to the strong bank capital buffers introduced by the post-crisis G20 reforms. Going forward, it will be important for authorities to closely monitor asset quality in those sectors most sensitive to interest rate increases – such as real estate – and to ensure that financing providers to those sectors manage their risks properly and remain resilient.”
Crypto And Digitization
Finally, Knot warned that cryptocurrencies and the digitization of finance in general pose risks to both the global system and to individual countries in terms of their monetary sovereignty and fiscal policies. FSB recently recommended a set of regulatory changes governments can make. Furthermore, at the request of India, FSB is planning to release a paper to the G20 that further identifies risk and recommends global policy coordination.
