NIESR Press Release: The risks of rising global indebtedness- August Review Commentary
In the Commentary of the August 2018 National Institute Economic Review no 245, to be published on 1 August, NIESR’s Associate Research Director for Global Macroeconomics Barry Naisbitt argues that high levels of debt (in private and public sector) are one of the main sources of vulnerability in the world economy.
Looking at the rise of debt since the Great Recession Barry Naisbitt notes that:
- Many of the major advanced economies now have higher debt-to-GDP ratios than a decade ago and as a whole they have some $30 trillion more debt than when they entered the financial crisis. The main source of the expansion of debt in advanced economies has been the widespread increase of public sector debt;
- Emerging economies have seen their debt rising rapidly, although their debt-to-GDP ratios are – with the exception of China- lower than those for advanced economies. The increase in debt in emerging economies has come from a widespread rise in the debt of non-financial companies, particularly in China.
- These rises in debt have contributed to new potential risks and vulnerabilities for the global economy. A reduction in monetary policy accommodation in the advanced economies in the coming years could affect those borrowers who are rolling over substantial funding.
Barry Naisbitt writes: “In several of the advanced economies, the rise in government debt was a clear economic and political concern. (…)While continued low rates help to reduce the financing cost for governments, they do not take away a concern that if rates were to rise by more than anticipated there would be adverse effects on governments’ financial positions.”
Turning to the financial stability concerns raised by growth in private sector debt he observes that where household sector debt-to-GDP ratios remain elevated, we need to understand whether higher ratios are “more likely to be supported by current and expected ultra-low interest rates than by more positive expectations of future income growth.”.
As for private sector corporate debt, he observes that it has been rising much faster in emerging markets than in advanced economies in recent years. “Corporate sector debt in China has increased particularly notably and has been commented upon as a possible cause for concern,” he adds.
Setting aside the obvious risk of another recession coming from some undefined shock and leading to widespread defaults due to the scale and pattern of debt, he identifies at least two other possible areas for concern.
- Sudden increases in debt service ratios could place an additional challenge on monetary policy authorities; the potential vulnerability created by higher indebtedness is likely to act as one factor constraining rapid rises in (and much higher) interest rates. The other side of this is that if a substantial shock occurs, rates still at ultra-low levels leave little ammunition for central banks to ameliorate the effects of such a shock, which, in turn, could put pressure on the public finances
- The interconnectedness of economies, especially at a financial level, has increased. The public and private sector nature of the growth of debt over the past decade could well mean that, as the Greek debt crisis demonstrated, providing an effective ‘bail-out’ could be a very difficult problem, requiring appropriate institutional structures to deal with any restructuring of debt.
“At a global level, at elevated debt levels, any sudden crisis may be turn out to be a test of the robustness of the international financial system as much as of the individual countries that may be directly affected by the adverse shocks.,” Barry Naisbitt adds, concluding: “For policy makers with concerns about the increased level of debt, perhaps the real risks will lie, however, with the ‘unknown unknowns’”
Notes for editors:
"The risk of rising global indebtedness” will be published in the National Institute Economic Review No. 245 August 2018.
This journal is a quarterly, peer reviewed, economic and social sciences journal. The full Review is published from midnight on Wednesday 1 August.
For the full article or to interview the author please contact the NIESR Press Office:
Paola Buonadonna on 020 7654 1923 / p.buonadonna [at] niesr.ac.uk
NIESR aims to promote, through quantitative and qualitative research, a deeper understanding of the interaction of economic and social forces that affect people's lives, and the ways in which policies can improve them.