Commentary: The Risks of Rising Global Indebtedness

Financial stability reports published by central banks and commentaries by international agencies such as the International Monetary Fund (IMF) and Bank for International Settlements (BIS) frequently highlight the high level of debt (private sector or public sector or both) as an important risk consideration for the outlook for both continued economic growth and for financial stability. While for every borrower there is also a lender, it is thought to be the debt side of the balance sheet that carries more risk in the economy. A standard view of debt is that it enables the smoothing of consumption and investment over time. But agents with debt can then become exposed to shocks to income and interest rates when repaying debt and to the lack of availability of funds when they need to re-finance debt as it matures or to issue new debt. The various analyses of the financial crisis reveal how some of these channels operated (or failed to operate) and views about the importance of the growth of debt before the crisis are likely being reflected in the continuing focus on debt. This commentary argues that high levels of debt are one of the main sources of vulnerability in the world economy and examines some common themes that have emerged across economies since the crisis.