While there are no statistically significant differences in the initial positions in debt sustainability between the debt booms currently underway and the completed booms, the ongoing booms have featured a much steeper deterioration in primary balances and sustainability gaps (Table 10). This has reflected larger increases in interest rate-growth differentials, specifically larger declines in growth rates, than in past booms. The ongoing booms have tended to start with more fragile balance sheets in EMDEs (despite insignificant differences), but the deterioration in balance sheet composition has thus far been no worse than in past booms (Supplementary Appendix Table S6).

The macroeconomic performance of economies that a currently undergoing debt booms has tended to be significantly weaker than that in the completed booms. Output growth in ongoing booms has averaged 1.3 percent–1.1 percentage point lower than in past debt booms. For investment growth, this difference has been even more pronounced.<sup>14</sup>

# 5. Conclusion

Even before the pandemic, the global economy had been experiencing the largest, fastest, and most synchronized wave of debt accumulation since 1970. In light of potential costs associated with rapid debt accumulation, the debt buildup over the past decade had raised concerns about its sustainability and the possibility of a financial crisis. The trade-off between benefits and costs of accumulating debt may increasingly be tilting towards costs now. The deterioration in fiscal balances and increase in debt during the pandemic-induced global recession in 2020 far exceeded those in previous recessions or debt booms over the past five decades, in line with an unprecedented output collapse and associated fiscal response.

While this deterioration was necessary and once again showed an important beneficial role of debt accumulation during the global recession, it exacerbates the risks associated with elevated government debt levels. High debt constrains policy makers’ ability to support their economies through future shocks and makes countries vulnerable to financial market disruptions. Indeed, during past sovereign debt crises, fiscal deficits tightened sharply and, yet, this tightening was not accompanied by significantly improved fiscal sustainability.

More than two-thirds of EMDEs are currently experiencing a government debt boom. Ongoing government debt booms have been longer than booms that ended before the pandemic. Macroeconomic outcomes have been weaker in booms currently underway and fiscal balances and sustainability gaps have deteriorated more in comparison with earlier such episodes. Half of such debt booms in EMDEs ended in financial crises in the past. Historical booms suggest that macroeconomic outcomes, including output, investment, and consumption growth, are significantly weaker when debt booms are associated with financial crises.

Debt is likely to rise further as governments and central banks continue supporting the recovery. Policy makers need to act to prevent liquidity constraints from derailing the recovery in activity and to provide space to assess debt sustainability, as well as to consider

> 14 When data for 2020 are excluded from the calculation for ongoing booms, macroeconomic outcomes for EMDEs tend to be significantly stronger than in previous booms. In addition, changes in debt sustainability are no longer statistically significant, unlike those based on ongoing booms including 2020. These results highlight the large negative impact of the COVID-19 pandemic on debt dynamics.

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