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S&P Global Ratings warns global debt is more highly leveraged than before the 2008 Global Financial Crisis as interest rates rise and economies slow.
The ratings agency sees painful times ahead for corporate borrowers at the low end of the credit spectrum, along with some governments who have loaded up with low-interest debt.
The report, How Heavy Is the World's Debt Burden, said the main challenge for the government sector in 2023 was a worsening of the geopolitical tensions.
"This continues to fuel inflation and rate hikes, adds pressures to weakened fiscal positions, while at the same time further increasing the conditions for political polarisation and social tensions, and the likelihood of sudden destabilising events - which, contrary to previous financial crises, can only marginally be resolved or influenced by public policy," it said.
The ratings agency also highlighted the massive debt carried by China's corporate sector, estimated at US$27 trillion and growing.
It said a stress test applied to some 20,000 unrated corporate indicated a significant increase in the number of loss makers and potential loan defaulters at 10 percent by the end of this year, which compared with 7 percent at the end of last year.
However, looking just at China, the agency said the number of loss makers could triple to 22 percent under severe stress, which posed a "contagion risk" to the world as China's corporate debt accounted for a third of global corporate debt.
The report indicates a sharp slowdown in the largest economies posed a significant risk to non-financial corporations and would lead to a global recession.
"In the mostly unrated corporate sample, we found that the consumer discretionary, industrials, and real estate sectors haven't fully recovered from the Covid. Our stress test sees their loss-makers rise by more than half, reaching 23 percent, 27 percent and 24 percent, respectively," it said.
When it comes to banks and other financial institutions, they would also face materially tighter market conditions, which would prove challenging for some.
Households would also feel the pain but delinquencies were not expected to see a dramatic rise, depending on the ongoing resilience of the labour market.
"Under a scenario with more severe stress - a full-blown recession with a sharp rise in unemployment - we would see delinquencies start to rise," it says.
"As households typically prioritize mortgage and car loan repayments, asset quality would weaken faster in unsecured borrowings, including credit cards."