After years of cheap borrowing, the global debt pile is growing increasingly unsustainable — especially for developing countries: A decade of cheap borrowing has led to a whopping global debt pile of USD 290 tn for households, businesses and governments, up by more than one-third from a decade ago, according to research from the Institute for International Finance. Global debt has actually decreased this year — after peaking on the back of a flurry of borrowing during the worst of the covid-19 pandemic — but the debt service burden is growing as a result of a steep global monetary tightening wave.

It’s a problem for everyone, but some have it worse than others: Higher debt loans will squeeze economies already struggling with a cost-of-living crisis, reports Bloomberg. But while developed countries will undoubtedly feel the strain, the danger is more acute for developing countries — especially those that borrow in USD — who face debt distress.

Level with governments, corporates were the biggest borrowers of cheap money, most recently through pandemic support packages. While emergency measures kept many companies afloat during a tough time, there is a risk of a rise in so-called “zombie” firms — which essentially earn only enough to service their debt, European Bank for Reconstruction and Development (EBRD) Chief Economist Beata Javorcik said, according to Reuters. The risk of contagion from these corporates would infect the progression of healthy firms in economies, by bringing down investment, revenue, and employment, Javorcik said. Zombie firms are more present in economies dominated by government-run companies and banks, according to the EBRD’s latest Transition Report (pdf).

Advanced economies saw the biggest drop in debt, with public and private debt dropping 5% of GDP last year, but for low-income countries, total debt rose to reach 88% of GDP, driven by higher private debt, reports Reuters. With debt levels the way they are, there are concerns of low- and middle-income countries to repay their debts, with 25% of emerging market countries and 60% of low-income countries are on the border of debt distress, the IMF said in a blog post accompanying its first Global Debt Monitor. Total public and private debt dropped 10 percentage points to 247% from its peak level of 257% a year earlier, the IMF said.

For the poorest countries, debt defaults means having less to spend on essential sectors and policies such as health, education, or adapting to climate change. Many have looked to alternative forms of debt relief — borrowing from private banks or non-governmental sources, with the Guardian reporting that by close of 2021, 61% of long-term public and publicly guaranteed debt worth USD 3.6 tn was owed to private creditors rather than Paris Club (officials from major creditor countries) or other official creditors, compared to 46% in 2010.

But alternative creditors present serious drawbacks — half the payback time scale, high interest rates and difficulty in negotiating or rescheduling payments. If a country defaults on a private bank loan, the debt restructuring process does not give priority to economic and developmental concerns or the sustainability of the repayments. The lack of debt transparency is a key constraint to a country’s return to economic stability, the World Bank said earlier this month.

A strain on sustainable development: The damage of large debt will depend on how high central banks push interest rates, and while these look set to continue (see the Federal Reserve’s most recent hike) the global effects are yet to come.The prospect of debt distress, which the World Bank put at 60% of low-income countries and more than 25% of middle-income countries, will endanger nations abilities to invest in the Sustainable Development Goals, according to the UN Conference on Trade and Development’s Trade and Development Report (pdf).

Less liquidity for households: Consumers are already feeling the effect of higher central bank rates on their monthly budgets, as housing debt will dominate, leaving less disposable income for goods and luxuries but also other necessities, like bills, education or future planning. Canadian, Australian and South Korean households are the most exposed as their countries dodged a housing or banking crash in the Great Recession and have a large share of floating-rate mortgages.

It’s not just mortgage debt that households need to account for: For the UK, debt payments will exceed 10% of all household incomes, while Scandis in Sweden and Norway should account 15% of their salaries to repayments, Bloomberg says.

Mounting debt, high inflation and low growth create an unsustainable burden that may lead to a global economic crash, says economist Nouriel Roubini, according to Business Insider. While raising interest rates may combat soaring prices (see: the Central Bank of Egypt and the US Federal Reserve, among others) Roubini warns that households and companies may no longer have the ability to meet their loan repayment commitments.