Brick by brick, the world order, a decades-old coquettish mistress of economic stability and security, is falling like a game of dominos. The international community has become accustomed to the post–World War II climate, where everyone always comes out on top, no matter how bad a financial crisis is. But, the aftermath of the coronavirus pandemic and the geopolitical chaos in Eastern Europe and the Middle East might have permanently damaged global peace and prosperity.
S&P Issues Warning for the World Order
According to S&P Global Ratings, countries could potentially default more frequently on their foreign currency debt over the next decade. This is due to the substantial increase in borrowing costs fueled by central banks' fight to curb inflation. Even before the Covid-19 public health crisis, sovereign credit ratings had weakened worldwide. "These factors quickly create liquidity challenges as access to financing dries up and capital flight accelerates," the report stated. "In many cases, this constitutes the tipping point where liquidity and solvency constraints become problematic for a government."
During the fallout of the pandemic, many nations' finances came under exceptional threat. A chorus of countries – such as Argentina, Belize, Ecuador, Lebanon, Zambia, and others – sang an aria of despair as they defaulted on their foreign currency debt. Following Russia's invasion of Ukraine, several more countries defaulted in 2022 and 2023.
Developing countries now depend more on government borrowing, running the printing press, and raiding foreign exchange reserves to offset the flight of foreign capital. The challenge, however, is that turbulence and unpredictable domestic policies have led to issues repaying debts.
Ballooning net interest payments and sticky inflation are adding to the cavalcade of problems. The report identified that interest costs in soon-to-default states are approaching or surpassing 20% of government revenues, and inflation has climbed to double-digit territory.
But can't these places pull a Greece and restructure their debt? Not quite. Unlike 40 years ago, S&P analysts note that government debt restructurings are not working, occurring at a snail's pace, or compounding the problem. "We also found that the long-term macroeconomic consequences are more severe for sovereigns that remain in default for multiple years, increasing the probability of further defaults down the line," they wrote.
Unfortunately, S&P’s warnings to the world order do not even tell half the story.
Global Debt Is Worse, Says IMF
The International Monetary Fund (IMF) recently published a detailed report examining the world's astronomical public debt levels. The global institution concluded in its October 2024 Fiscal Monitor that the situation is "probably worse than it looks." IMF economists forecast that global debt will exceed $100 trillion by the year's end, representing approximately 93% of international gross domestic product. It will hit 100% of GDP by 2030.
Officials prognosticate that "future debt levels could be even higher than projected, and much larger fiscal adjustments than currently projected are required to stabilize or reduce it with a high probability." They purported in the report that sizable spending pressures, enormous unidentified debt, and optimism bias of debt projections suggest that "the fiscal outlook of many countries might be worse than expected." The report added:
"Previous IMF research has shown that fiscal discourse across the political spectrum has increasingly tilted toward higher spending. And countries will need to increasingly spend more to cope with aging and healthcare; with the green transition and climate adaptation; and with defense and energy security, due to growing geopolitical tensions.
"On the other side, past experience suggests that debt projections tend to underestimate actual outcomes by a sizable margin. Realized debt-to-GDP ratios five-years ahead can be 10 percentage points of GDP higher than projected on average."
Back home, the United States endured credit outlook downgrades in 2023 amid a mounting national debt swallowing the national economy. With $200 trillion in unfunded obligations, it is only a matter of time before these agencies cite the United States as a growing risk to the world order.
Surely, the private sector is outperforming the government, right? Right? Uh, no, Shirley.
Businesses Struggling
Corporate bankruptcies have been steadily increasing this year across the globe, led by the world's largest economy.
In the first nine months of the year, 512 large US companies declared bankruptcy, and 59 entities filed for bankruptcy in September alone. The latest numbers from the new S&P Global Market Intelligence data show that 2024 has experienced the largest number of corporate bankruptcies (businesses with $1 billion or more in liabilities) in 14 years outside the pandemic. Of course, if you wish to insert the public health crisis, the United States is shy of just six.
The rest of the business community is not faring well. In the second quarter of 2024, the number of US bankruptcies surged by close to 40% compared to a year ago, totaling nearly 6,300 cases. This is the highest level in seven years. Additionally, over the last three years, bankruptcy filings have doubled and risen at the fastest pace since the global financial crisis.
Other regions are witnessing comparable trends. Eurostat data highlight that bankruptcy declarations climbed in the eurozone by more than 3% in the second quarter from the previous three-month span.
This is bad news for governments starving for more revenues. While politicians refrain from making tough challenges and retreat into the comfort of political expediency, they need to inject more tax receipts into government coffers. Unfortunately, if companies are folding faster than Republicans on the House floor, Washington and the rest of the world leaders will have fewer dollars, euros, and pounds to waste.
What Happened to the $107 Trillion?
Fidelity Investments published a fascinating chart highlighting the global money supply. In October, international liquidity reached an all-time high of $107 trillion, up from about $79 trillion before the pandemic. If the planet is drowning in freshly printed money, where is it all going? The answer – if there is one – might be as confusing as any world salad response uttered by Vice President Kamala Harris.
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