Global debt levels have climbed US$500 billion in the past year to a record US$217 trillion, a new study shows, just as major central banks prepare to end years of super-cheap credit policies.
World markets were jarred this week by a chorus of central bankers warning about overpriced assets, excessive consumer borrowing and the need to begin the process of normalizing world interest rates from the extraordinarily low levels introduced to offset the fallout of the 2009 credit crash.
Years of cheap central bank cash has delivered a sugar rush to world equity markets, pushing them to successive record highs.
However, another side effect has been explosive credit growth as households, companies as well as governments rushed to take advantage of rock-bottom borrowing costs.
Global debt, as a result, now amounts to 327 percent of the world’s annual economic output, the Washington-based Institute of International Finance (IIF) said in a report late on Tuesday.
One of the most authoritative trackers of global capital flows, the institute’s report highlighted “rollover” risks, especially in emerging markets that have borrowed in hard currencies such as euros and dollars.
Such debts will become costlier to service if Western interest rates rise and currencies strengthen.
The institute said the surge in indebtedness was largely down to a US$3 trillion rise in debt levels across the developing world, which now have debt totaling US$56 trillion.
That is 218 percent of their combined GDP, a 5 percentage point rise over year-ago levels, the institute said in the Global Debt Monitor — June 2017.
China accounted for US$2 trillion of this rise, with its debt now at almost US$33 trillion, data showed.
“Rising debt may create headwinds for long-term growth and eventually pose risks for financial stability,” the institute said. “In some cases, this sharp debt build-up has already started to become a drag on sovereign credit profiles, including in countries such as China and Canada.”
EUROZONE AND US
The report acknowledged that advanced economies had continued to deleverage, cutting total public and private debt by more than US$2 trillion in the past year, but this was mainly due to the eurozone.
Total US debt raised US$2 trillion to more than US$63 trillion by the first quarter of this year.
However, it is in the developing world that stresses are most likely to emerge, the institute said.
First, emerging hard currency-denominated debt rose by US$200 billion in the past year — growing at its fastest pace since 2014 — and 70 percent of this was in US dollars, the report said.
Second, emerging markets have a hefty debt repayment schedule with more than US$1.9 trillion of emerging bonds and loans falling due by the end of next year, and 15 percent of this denominated in dollars, the report said.
The biggest redemptions were in China, Russia, South Korea and Turkey, the institute said.
“Rollover risk is high,” it added.
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