Global Debt Level Unsustainable?

Global debt hit a record high of over $250 trillion in the first half of 2019. Primarily led by a surge in borrowings in the U.S. and China according to a new report (November 2019) by International Institute of Finance (IIF). Global debt surged by $7.5 trillion in the first six months of 2019. The IIF said the overall number hit $250.9 trillion at the end of this period, and will exceed $255 trillion by the end of 2019.

“China and the U.S. accounted for over 60% of the increase. Similarly, EM debt also hit a new record of $71.4 trillion (220% of GDP). With few signs of slowdown in the pace of debt accumulation, we estimate that global debt will surpass $255 trillion this year,” the IIF said in the report.

  

 Rising debt across the world has been a big concern for investors and has also been flagged as the next breaking point by a number of economists. Record low interest rates make it extremely easy for corporates and sovereigns to borrow more money.

Fe’s Powell: Debt is growing fast than economy, and that’s not sustainable

The International Monetary Fund (IMF) last month escalated its warnings about high levels of risky corporate debt, which have been exacerbated by persistent low interest rates from central banks. The IMF warned that almost 40%, or around $19 trillion, of the corporate debt in major economies such as the U.S., China, Japan, Germany, Britain, France, Italy and Spain was at risk of default in the event of another global economic downturn.

 “The big increase in global debt over the past decade — over $70 trillion — has been driven mainly by governments and the non-financial corporate sector (each up by some $27 trillion). For mature markets, the rise has mainly been in general government debt (up $17 trillion to over $52 trillion). However, for emerging markets the bulk of the rise has been in non-financial corporate debt (up $20 trillion to over $30 trillion).”

The IIF cites the deepening of global bond markets as the reason for the rise in debt levels. The global bond markets increased from $87 trillion in 2009 to over $115 trillion in mid-2019. The growth was mostly seen in the government bond market - which now make up 47% of global bond markets compared to 40% in 2009.

Global government bond market, especially the so-called safe-haven assets such as U.S. Treasurys have been very crowded lately as investors rush to safer assets amid uncertainty due to Brexit, a global growth slowdown and President Donald Trump’s impeachment in the U.S.

Is it sustainable?

Federal Reserve Chairman, Jerome Powell thinks so. He does not see any bubbles brewing or any immediate danger. But in a low or negative interest rate environment it is “fake”. Once rates start to move up or a black swan appears (major market disruption), then there will be a scramble for cash and liquidity. So it is best to remain prudent in 2020.

Reference:

Global debt surged to a record $250 trillion in the first half of 2019, led by the US and China, Spriha Srivastava, Nov 15, 2019, CNBC