Global borrowing hits record as big central banks prepare to tighten credit

Global debt levels have climbed $500 billion in the past year to a record $217 trillion, a new study shows, just as major central banks prepare to end years of super-cheap credit policies.

World markets were jarred this week by a chorus of central bankers warning about overpriced assets, excessive consumer borrowing and the need to begin the process of normalising world interest rates from the extraordinarily low levels introduced to offset the fallout of the 2009 credit crash.

This week, US Federal Reserve chief Janet Yellen has warned of expensive asset price valuations, Bank of England Governor Mark Carney has tightened controls on bank credit and European Central Bank head Mario Draghi has opened the door to cutting back stimulus, possibly as soon as September.

Years of cheap central bank cash has delivered a sugar rush to world equity markets, pushing them to successive record highs. But another side effect has been explosive credit growth as households, companies and governments rushed to take advantage of rock-bottom borrowing costs.

Global debt, as a result, now amounts to 327 per cent of the world's annual economic output, the Institute of International Finance (IIF) said in a report late on Tuesday.

One of the most authoritative trackers of global capital flows, the IIF report highlighted "rollover" risks, especially in emerging markets that have borrowed in hard currencies such as euros and dollars.

Such debts will become costlier to service if Western interest rates rise and currencies strengthen.

While US interest rates have already been raised four times, the euro has surged to one-year highs after Draghi's comments on Tuesday, while German 10-year government bond yields - the benchmark for euro area borrowing - have doubled over the past two days.

The Fed too seems intent on continuing to tighten policy Philadelphia Fed President Patrick Harker said this week balance sheet normalisation should be put on "autopilot".

And despite Britain's tepid economy, several Bank of England ratesetters too voted this month to raise interest rates.

The IIF said the surge in indebtedness was largely down to a $3 trillion rise in debt levels across the developing world, which now have debt totalling $56 trillion. That is 218 per cent of their combined GDP, a five percentage point rise over yearago levels, it said.

China accounted for $2 trillion of this rise, with its debt now at almost $33 trillion, data showed.

"Rising debt may create headwinds for long-term growth and eventually pose risks for financial stability," the IIF said.

"In some cases, this sharp debt build-up has already started to become a drag on sovereign credit profiles, including in countries such as China and Canada."