Global debt reached a new high of $307 trillion in Q2

The Institute of International Finance (IIF) stated on Tuesday that global debt reached a record $307 trillion in the second quarter of the year, despite rising interest rates restricting bank credit, with markets such as the United States and Japan driving the increase.

According to the financial services trade group, worldwide debt in dollars increased by $10 trillion in the first half of 2023 and by $100 trillion over the previous decade.

It stated that the recent increase has raised the global debt-to-GDP ratio to 336% for the second quarter in a row. Before 2023, the debt ratio had been falling for seven quarters.

Slower growth, along with a deceleration in price increases, was cited as the cause of the debt ratio increase, according to the report.

"The sudden rise in inflation was the main factor behind the sharp decline in debt ratio over the past two years," the IIF said, adding that with wage and price pressures moderating, even if not to their targets, they expect the debt to output ratio to surpass 337% by year-end.

More than 80% of the latest debt accumulation came from the developed world, with the United States, Japan, Britain, and France experiencing the greatest rises. The highest growth in developing markets came from the world's major economies, particularly China, India, and Brazil.

"As higher rates and higher debt levels push government interest expenses higher, domestic debt strains are set to increase," the IIF said.

According to the report, household debt-to-GDP in developing countries is still higher than it was before COVID-19, owing mostly to China, Korea, and Thailand. However, in mature markets, the same ratio fell to its lowest level in two decades in the first six months of the year.

According to the CME FedWatch tool, markets are not pricing in a rate hike by the United States Federal Reserve in the near future, but the current target rate of between 5.25% and 5.5% is expected to remain in place until at least May of next year.

Rates in the United States are expected to remain high for an extended length of time, which could pressure developing economies as required investment flows to the less-risky developed world.

The Fed is expected to keep interest rates unchanged at the end of its meeting on Wednesday, but it could signal that it is open to boost rates further.