Sitting at more than double the balance at the start of this century, the world is awash with $152 trillion dollars of debt which is at an all-time high, according to the IMF.
This debt mountain signifies the extent to which increases in borrowing have outpaced economic growth during the period between 2002 and 2015 and the figure as of 2015, represents 225 percent of gross domestic product (GDP), up from 200 percent in 2002.
The IMF has urged governments in certain countries to tackle excessive private debt levels eve as the Washington D.C.-based organization emphasized that there is no exact science to knowing how much debt is too much.
The role of low rates has been critical for this phenomenal increase in global debt.
Many corporates have taken advantage of the favorable terms to issue aggressive levels of debt aided by a prolonged period of low interest rates.
Such low rates of interest initiated when central banks employed a toolkit that aimed to counter the effects of the global financial crisis and consequently slashed benchmarks as part of the toolkit.
Eroding of outstanding debt balances has been made more challenging by the ongoing low interest rate environment. The IMF is of the opinion that outstanding debt balances can be more easily repaid in a climate of higher inflation.
A negative feedback loop, in which debt deflation is causing the real burden of debt to increase, leading to poorer economic growth and yet further deflation, is resembled by the dynamics of the current situation, warned the IMF.
Accepting that the room for maneuver had shrunk since the beginning of the global financial crisis, the IMF acknowledged the decreasing menu of options available to policymakers to trigger effective actions. To Maximize the impact, the fund also called on fiscal, monetary and structural solutions to be looked at synergistically.
Saying private debt is high not only among advanced economies but also in a few “systemically important” emerging market economies, namely Brazil and China, the organization has sought to pinpoint where it sees the biggest potential problem areas.
The report also showed the swelling of their balance sheets in the years since the financial crisis even though governments only account for around one-third of the world’s debt.
The IMF’s semi-annual Fiscal Monitor report said that the depth and duration of a potential financial recession triggered by too much borrowing can be reduced if the fiscal actors play a crucial role in creating a stabilizing climate in which growth can flourish and debt balances can be safely unwound.
Europe, where an impaired banking system was a hurdle to successful deleveraging, was pointed out as an example by the IMF. A country at risk of a disorderly wind-down of current high corporate debt levels was China as identified by the IMF.
As global consensus continues to grow that monetary policy is reaching its limits of effectiveness, the IMF is expected to repeat its call for states to step up and play a more supportive role at this week’s meeting with the World Bank in Washington.
(Adapted from CNBC)
Categories: Economy & Finance