Fugitive thief of global debt is now a potential killer

The mountain of global debt is of particular concern because of the sharp series of interest rate increases in the US
The threat that debt levels in different sectors of the economy pose to financial markets should be more clearly communicated

Anthony Rowley

Published: 3:45pm, 24 Feb 2024

Why you can trust SCMP

Financial crises have a way of creeping up on the world like a thief in the night and they come from different causal directions. The next one is very likely to come from debt problems – unless beaten to it by a stock market crash – and it is already close on our heels.

It may not appear that way because global debt has been mounting for decades and life goes on. But the nature of the debt threat has changed relatively recently along with rising interest rates, and the figurative “thief” is now a potential killer.

Not all great financial crises of the past have been debt crises, but debt defaults, especially at the government level, have a way of morphing into “panic on financial markets and economic slowdowns”, as the World Economic Forum put it in December.

The Institute of International Finance (IIF) reported in its latest Global Debt Monitor on February 21 that over US$15 trillion was added to the global debt mountain last year, and the total is now a record US$313 trillion. But it is not so much facts that provide most cause for concern.

Nor is it the IIF warning that uncertainty about US interest rates and the dollar could increase market volatility and tighter funding conditions for some countries and that “deepening geoeconomic fragmentation, geopolitical conflicts and rising trade protectionism may lead to more frequent and abrupt changes in global risk sentiment”.

It is that fact that the recent inflation episode in the US which proved to be more than just “transitory” has been followed by an extended period of rising interest rates that is also proving to be more than transitory. Other things being equal, this might be something the global economy could cope with.

Grocery items are offered for sale at a supermarket in Chicago, Illinois, on August 9, 2023. The US Federal Reserve began raising interest rates to counter inflation in March 2022. Photo: Getty Images / AFP

But other things are not equal, or at least not the same as they were at the time of previous debt crises. The “great moderation” in inflation from the mid-1980s to 2007 was accompanied by widespread excess in global borrowing.

That borrowing is a deadweight at the best of times but when it is followed by a sharp and rapid series of interest rate hikes, such as seen in the past two years and which looks unlikely to be reversed any time soon, it threatens to prove especially pernicious.

This does not appear to have sunk in yet with financial markets, which are celebrating the fact that inflation appears to be stabilising and retreating. Markets are still euphoric enough to be hoisting stock prices from Tokyo to New York to record levels and the IIF report points to a growing appetite for borrowing in some markets.

Japan’s split-screen economy: roaring stocks and shrinking GDP

Failure to grasp the full implications of high debt levels is not entirely the fault of financial markets. Equation-laden models abound at the macroeconomic level but are harder to find at the financial system level.

This is not good enough, especially in the age of artificial intelligence. Economists virtually ignored the implications of asset inflation (in stock and real estate prices) for decades and the financial system often seems to be beneath their ivory tower gaze too.

The sudden and unannounced arrival of financial crises is nothing new. Recall the stock market crash of 1929 and the Great Depression, the Opec oil price shock in 1973, the Latin American debt crisis in the 1980s, the 1997 Asian crisis and the global financial crisis of 2008.

The IIF report notes that around 55 per cent of the rise in global debt originated from mature markets, mainly driven by the US, France and Germany. In emerging markets, the debt accumulation was mostly concentrated in China, India and Brazil.

By sector, the largest increases in the dollar value of outstanding debt was observed in central governments , followed by non-financial companies. Debt outside the financial sector hit US$244 trillion, exceeding pre-pandemic levels by US$45 trillion.

Soaring debt is not just a Chinese problem

Among the four major categories of debt included in IIF data (household, non-financial corporate, government and financial sector) corporate debt led, totalling US$94 trillion as at the end of 2023, up from near US$90 trillion a year earlier. Of this, US$51 trillion was in mature and US$44 trillion in emerging markets.

Next biggest was government debt, totalling US$90 trillion in 2023 versus US$84 trillion in 2022, followed by financial sector debt totalling US$69 trillion (up from US$67 trillion) and household debt totalling US$59 trillion (up from US$57 trillion). Most of the debt was in mature markets at US$208 trillion, with US$105 trillion in emerging markets as at the end of 2023.

By country, debt levels are listed by the IIF only as a percentage of gross domestic product and not in money terms. Levels that stand out by this measure include government debt at 230 per cent in the case of Japan, 120 per cent in the US but a more modest 86 per cent in China.

Corporate debt is high in China at 167 per cent of GDP and 115 per cent in Japan versus a more modest 78 per cent in the US. Household debt is a relatively high 73 per cent of GDP in the US versus 64 per cent in Japan and 62 per cent in China. Such data is useful from a statistician’s perspective but it does not offer a holistic picture that would help markets determine when and where danger levels have been reached.

Anthony Rowley is a veteran journalist specialising in Asian economic and financial affairs

Post