Spurred by super-cheap cash, global borrowing hits record

Major central banks prepare to tighten credit policies

LONDON: Global debt levels have climbed $500 billion in the past year to a record $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 normalising 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. But another side effect has been explosive credit growth as households, companies and governments rushed to take advantage of rock-bottom borrowing costs.

Global debt, as a result, now amounts to 327% of the world’s annual economic output, the Institute of International Finance (IIF) said in a report late on Tuesday.

One of the most authoritative trackers of global capital flows, the IIF 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.

While US interest rates have already been raised four times, the euro has surged to one-year highs after European Central Bank President Mario Draghi’s comments on Tuesday, while German 10-year government bond yields - the benchmark for euro area borrowing - have doubled over the past two days.

The Fed too seems intent on continuing to tighten policy - Philadelphia Fed President Patrick Harker said this week balance sheet normalisation should be put on “autopilot”. Despite Britain’s tepid economy, several Bank of England rate-setters too voted this month to raise interest rates.

The IIF said the surge in indebtedness was largely down to a $3-trillion rise in debt levels across the developing world, which now has debt totalling $56 trillion. That is 218% of their combined GDP, a five-percentage-point rise over year-ago levels, it said.

China accounted for $2 trillion of this rise, with its debt now at almost $33 trillion, data showed.

“Rising debt may create headwinds for long-term growth and eventually pose risks for financial stability,” the IIF 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.”

Published in The Express Tribune, June 29^th, 2017.

Like Business on Facebook, follow @TribuneBiz on Twitter to stay informed and join in the conversation.