BIS Sounds Warning on Global Debt Ratios
(25 June 2018 - Global) Debt ratios have ratcheted higher to record levels during the era of low interest rates and cheap money, flashing warning signs of late-cycle excess and leaving markets vulnerable if, or more importantly when, interest rates inevitably rise.
The Bank for International Settlements warns that any reversal will be “quick and sharp” in line with the release of group’s annual report. Governments have exhausted monetary and fiscal policy levers required lift their economy out of future recessionary trading conditions, with the BIS highlighting that governments globally are being forced “to walk a treacherous and narrow path in these circumstances, careful not to kill the recovery by over-tightening or to let the inflation genie out of the bottle by running economies too hot”. The rising US dollar threatens to set off a sudden liquidity squeeze and potential squeeze on emerging markets capital inflows. Global debt has increased from 180 per cent of GDP in 2017 to almost 220 percent, primarily influenced by emerging market credit market activity. Banks now maintain higher capital ratios and are arguably safer than in 2007 but the risk has rotated to pension funds, insurers and asset managers overseeing $US160 trillion of global wealth - including an estimated $US45 trillion of shadow banking.
The BIS stated that credit spreads were "at or below" levels last seen just before the 2007 global financial crisis and argued that central banks must alter their approach to inflation targeting which currently allows asset price bubbles overrun then intervene as a lender of last resort during decline, resulting in poor productivity growth. The aggregate debt ratio for emerging markets has shot higher by 63 percentage points since 2007, led chiefly by China. Signs of stress are spreading beyond troubled markets such as Turkey and Argentina to Indonesia, South Africa and Brazil, among others. The US and Europe will increasingly feel the effect, causing a contagion effect that will be difficult to contain. Emerging markets have accounted for two thirds of global growth over the last seven years and world asset markets are already stretched.
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