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Gaspar: Global debt is one of the major headwinds
against growth. Photo EPA

IMF warns on record $152 trillion global debt

WASHINGTON, October 6, 2016

Global debt, currently at an all-time high of $152 trillion, could thwart the fragile economic recovery, the IMF warned on Wednesday, highlighting that reducing debt significantly will require fiscal policies that support economic activity.

Global debt has continued increasing in the aftermath of the global financial crisis, reaching 225 per cent of world GDP by the end of 2015, the International Monetary Fund (IMF) said in its new Fiscal Monitor report.

About two-thirds, or close to $100 trillion, consists of private sector liabilities. Although not all countries are in the same phase of the debt cycle, the sheer size of the global debt raises the risks for an unprecedented deleveraging—a reduction of debt levels—that could hamper growth worldwide.

"Global debt is one of the major headwinds against growth in the world economy," said Vitor Gaspar, director of the IMF's Fiscal Affairs Department.

The October 2016 Fiscal Monitor examines the extent and makeup of global debt and uses a new database covering virtually the entire world to explore fiscal policy’s role in facilitating the adjustment needed to reduce debt to less risky, more manageable levels.

A diverse debt landscape

Private debt is high in advanced and a few systemically important emerging market economies, but trends have varied widely since 2008:

Advanced economies, the epicenter of the crisis, have deleveraged unevenly, and in many cases private debt has continued climbing. Public debt levels have also risen in these countries, partly as a result of their taking on private sector liabilities through bank bailouts.

Easy access to financing worldwide has led to a private credit boom in some emerging market economies, notably China.

In low-income countries, private and public debt levels have also risen, thanks to greater availability of and wider access to financial services, as well as improved market access, but debt-to-GDP ratios generally remain low.

It all comes back to growth

Deleveraging has so far proceeded slowly among highly indebted advanced economies, largely because of the current environment in which growth rates and inflation remain low. Deleveraging can make matters worse by putting a further drag on economic activity. High debt levels can slow the pace of economic recovery for a number of reasons.

First, high private debt levels increase the likelihood of financial crises, which are usually accompanied by deeper and more protracted economic slowdowns than those associated with normal recessions. The risks are not confined to private debt, as entering a financial crisis with high public debt levels exacerbates the effects of a financial crisis, more so in emerging markets than in advanced economies.

Second, excessive debt levels can weigh on an economy’s growth even in the absence of a financial crisis, as highly indebted borrowers ultimately reduce their investment and consumption.

But fiscal policy cannot solve the debt problem alone. Given the limited room for policy action noted earlier, it is imperative to exploit complementarities across different policy tools—including monetary, financial, and structural—to get more mileage out of any fiscal intervention.

Preventing excessive private debt

“It is important to have in place measures to prevent excessive debt build-ups,” said Gaspar, particularly in emerging markets, where private sector leverage has increased rapidly over the last few years. The report makes three key recommendations:

•    Regulatory and supervisory policies should ensure that private debt levels are monitored and sustainable.

•    Fiscal policy should be countercyclical in upturns to create buffers for cushioning downturns.

•    Incentives in tax policy that encourage debt should be phased out to limit excessive leverage build-up.

“The global financial crisis taught us that it is very easy to underestimate the risks associated with excessive private debt during upswings and underscored the cost of responding too slowly to a financial crisis,” said Gaspar.

“Fiscal policy can do more than it is currently the case to restore nominal growth, facilitate the necessary economic adjustment following a crisis, and build resilience in an economy to withstand future upheavals. However, it cannot do it alone; it has to be supported by complementary policies within credible frameworks,” he added. – TradeArabia News Service




Tags: GDP | IMF | Global debt |

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