Toronto Star

Taking stock of the world’s debt

Growing debt goes hand-in-hand with growing economies, but it can be a warning sign

- AARON KURILOFF

The world has never had as much debt as it has right now— nearly $250 trillion.

That figure is three times what it was two decades ago, according to a Citigroup analysis of data from the Institute of Internatio­nal Finance. The biggest borrowers: the U.S., China, the eurozone and Japan, which have more than two-thirds of the world’s household debt, three-quarters of corporate debt and nearly 80% of government debt.

Growing debt goes hand-inhand with growing economies, and for every borrower there is a lender for whom a loan or a bond is an asset. But large debt loads can be signs of trouble if borrowers can’t repay, and pockets of untested borrowing have sprouted in the decade after the financial crisis: corporate debt in China, foreign-currency borrowing in emerging markets, newly popular forms of debt among American households.

And the world’s debt loads are about to get a big test: Global central banks, which once kept borrowing easy, are changing course.

“We’re in a new era,” said Emre Tiftik, deputy director of global capital markets at the Institute of Internatio­nal Finance. “Debt levels can serve as early warning signals that alert to overheatin­g in specific countries and sectors.”

Investors expect to confront that new era head-on in 2019. Hopes for a surge in growth sweeping the world have faded, yet the Federal Reserve has signaled it intends to push ahead with raising interest rates and removing postcrisis stimulus measures. Tightening financial conditions and signs of strain in credit markets have reinvigora­ted the long-running debate about where another debt crisis might lurk, or if investors’ fears are unfounded.

Since the financial crisis incubated in the credit markets, investors and economists have watched the growth of debt cautiously. Debt can spark growth, giving business and government­s fuel for industry and infrastruc­ture. But excessive debt can drag on economies, impeding the ability of government­s to respond to downturns and prolonging recessions.

Among the concerns for investors and economists: that the debt incurred since the crisis hasn’t been put to optimal use. Some worry that companies have borrowed to repur- chase shares or that consumers have used debt to fund discretion­ary purchases.

In recent years, government debt has grown sharply, a shift from the private-sector borrowing surge that preceded the crisis. It was government­s that borrowed extensivel­y to help power through the aftermath.

Many investors are confident that wealthy countries which issue debt in their own currencies—the U.S. and Japan chief among them—pose little threat to markets. (With the exception of the U.S., Group of Seven countries have lowered debt relative to their economic output in recent years.)

“If nothing else, the 2018 U.S. budget deficit teaches us that developed economies have a lot more room to issue debt without significan­t negative consequenc­es,” said Guy LeBas, chief fixed-income strategist at Janney Montgomery Scott.

Highly indebted companies represent a greater concern to investors. Businesses in the U.S. spent the postcrisis years taking advantage of ultralow rates to borrow cheaply, driving corporate debt to roughly 46% of gross domestic product, according to federal statistics. While tax cuts have boosted companies’ coffers recently, the growth of debt relative to earnings over the past few years has also led to a large quantity of corporate bonds rated at the bottom level of the investment­grade range, a trend some analysts worry could hurt investors if a shock causes widespread downgrades.

Companies in emerging markets, particular­ly China, have binged even more, part of a broad surge in borrowing in the developing world. Investors are particular­ly worried about debt issued in foreign currencies. Emerging-market economies need to pay down or refinance roughly $2 trillion of debt in 2019. Tightening monetary policy in the U.S. and other advanced economies, along with a recent rise in the U.S. dollar, makes it harder for developing economies to pay off their loans.

Some important measures of debt have also declined in recent years. U.S. household debt, which soared ahead of the crisis, fell steeply afterward. Now it is poised to top $4 trillion for the first time, according data from the Federal Reserve Bank of New York.

Yet with robust wages and relatively high savings, Americans show few signs of difficulty managing the load.

Borrowing by banks has also declined, leading to a more stable and resilient financial system than the one which stumbled through the global financial crisis, several analysts said.

In some cases, investors worry that debt has been curtailed in ways that could hurt the economy. Banks, for example, have retreated from cross-border lending, which some economists said makes global finance less risky but may deal another blow to trade.

Few think debt is about to topple the world’s financial system or major economies. But as central banks end stimulus measures, many investors are on alert.

“We’ve never had a zero-rate environmen­t before, and we’ve never had to come out of one until now,” said Win Thin, global head of currency strategy at Brown Brothers Harriman.

 ?? EVA HAMBACH AGENCE FRANCE-PRESSE ?? Global central banks, which once kept borrowing easy, are changing course.
EVA HAMBACH AGENCE FRANCE-PRESSE Global central banks, which once kept borrowing easy, are changing course.

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