If you thought the colossal volume of world debt revealed by the IMF yesterday at $152tr was scary, look away now. According to the leading trade body representing global banks, the Institute of International Finance, the figure is much worse, at $162tr, or 243% per cent of world GDP.
The new number, which goes up to June 2016, was revealed to Emerging Markets by Hung Tran, executive managing director of the IIF, and trumps the IMF total which was generated on a new database that covers 130 countries covering the 15 years to the end of 2015.
Tran added that if bank debt is added in, global debt soars even higher to an enormous $216tr, or 327% of GDP. Even though bank debt is in the form of loans to the non-financial sector and “washes out,” it still represents “loan contracts” and should be included in the global total, he said.
Victor Gaspar, director of the IMF’s Fiscal Affairs Department, warned that the record levels of debt could lead to a “financial crisis” in the absence of pre-emptive fiscal and other measures to deal with the situation.
INTEREST RATE RISES
Gaspar told Emerging Markets that despite the record debt levels he was “not worried” about possible market reaction to further rises in the US Federal Reserve’s interest rates. However, the IIF’s Tran said there were causes for concern.
Debt service costs had risen, even in the face of record low interest rates, because of the “sheer scale” of global debt, said Tran. And, if interest rates rose, either because of Fed action or an increase in “inflation expectations” borrowers were going to find themselves in trouble, he said.
That will add to the “headwinds” that are already slowing the global economy and that in turn will restrict growth further and raise the level of non-performing loans and financial sector distress, Tran added.
Around two thirds, or some $100tr, of the figure quoted by Gaspar represented private sector debt while the rest was in the public sector, where overall debt had now reached 85% of GDP. “Excessive debt is a major headwind against global recovery and a risk to financial stability,” the IMF official said. “Rapid increases in private debt often end up [causing] financial crises [and] financial recessions are longer and deeper than normal recession.”
Private debt, he noted, “is concentrated in advanced countries and a few systemically important emerging market economies”. In advanced economies, “which were at the epicentre of the global financial crisis, deleveraging has been uneven and in many cases private debt had continued rising. Public debt has also surged in these countries, partly due to the migration of bad debt of the private sector into the government balance sheet.”
According to the IMF’s latest Fiscal Monitor, “low nominal growth is a major driver behind slow deleveraging in advanced economies.” Fiscal policy “can do more to restore growth and stability,” Gaspar suggested. “Targeted fiscal intervention in the form of government-sponsored programmes to help restructure private debt can be very effective, particularly in China.”
Fiscal policy “cannot go it alone” Gaspar added. “Policy frameworks that include monetary, fiscal and structural measures [can lead to] an eventual sustainable downtrend in government debt to GDP ratios”.