The end of an era of cheap money will reveal a global debt problem, warns Reuters in an analysis, prepared by the agency columnist Hugo Dixon. The debt of governments, companies and households was 195% of global GDP in 2007, according to the International Monetary Fund. By the end of 2020 it had reached 256%. These debt mountains are harder to bear because interest rates are rising to stamp out inflation, the Covid-19 pandemic and the energy crisis have clobbered growth, and investors are more averse to risk.
According to analysis all of these will cause economic stress especially in Europe, China and the Global South, poisoning domestic politics and geopolitics. Debt has risen for three main reasons – the first step was the governments bailed out the financial system, then they supported households and companies during the pandemic and now they are cushioning the blow of high gas and electricity prices.
In this regard, Bulgaria is not an exception – the open economy and financial system are highly dependent on the actions of the European Central Bank and the Federal Reserve. Compensations, mainly for businesses and less for households, began to be granted already in the first months of COVID-pandemic, spilling over into those of high gas and electricity prices.
Cheap money, issued during the so-called “printing” or quantitative easing, are accepted as a painkiller. If the borrowers had used the money to fund productive investment, that might not have mattered. But instead much of them are spent on unproductive investment or consumption.
The United States has some protection from this problem, thanks to the reserves of shale gas and the rising dollar, which will help it stop inflation faster. But the problems remain for other countries – primarily for those that have borrowed in dollars. According to Bulgarian National Bank’s data, less than 1% of bank loans are in currency, other than Bulgarian leva or euro and less than 7% is denominated in USD.
For now Europe hasn’t seen a rise of non-performing loans(NPL) for either business or households, but concerns for change are growing. According to Eurostat data in the second half of 2022 the level of household savings decreased to 13.7%, 1.5 percentage points drop compared to the first quarter of the year. Household investments remain at 10%. The data is calculated as a share of gross disposable income.
In the last three years the debt-to-income ratio of European households has been rising after a long period of decline. By the end of 2021 the average level in the eurozone was 96.49%. Partly for Bulgaria and generally for the EU the data is not available. The highest levels of private debt-to-income ratio are in Denmark, Norway (more than 200%), and also in the Netherlands.
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