High indebtedness has become a prominent feature of today’s global landscape. Fuelled by the protracted period of low interest rates, public and private debt levels have reached record highs in many countries. Amid signs of weakening global growth and tightening liquidity conditions, these unprecedented debt burdens pose a significant risk to financial stability. The recent upsurge in leveraged loans – a particularly risky form of finance – is also worrying, given its resemblance to the pre-crisis subprime mortgage market. In the current uncertain environment, a shock to investor confidence could trigger fire sales and a downward spiral in asset prices, leading to an increase in credit defaults and bankruptcies.

Should such a scenario materialize, fiscal stimulus measures can help countries to bolster growth and avert a sharp economic downturn. However, faced with persistent fiscal deficits and high public debt, many developed and developing countries now have limited fiscal space to do so. In parts of Africa and Western Asia, sovereign external bond issuances have continued to rise, reinforcing fiscal vulnerabilities. In efforts to restore public finances to a more sustainable footing, several governments have in recent periods introduced a range of fiscal adjustment measures, which include the introduction of value-added taxes, freezing public sector salaries, and accelerating pension reforms.

Read more in the March Monthly Briefing on the World Economic and Social Prospects