Global debt soars, along with fears of crisis ahead
Ten years after the worst financial panic since the 1930s, growing debt burdens in key developing economies are fueling fears of a new crisis that could spread far beyond the disruption sweeping Turkey.
The loss of investor confidence in the Turkish lira, which has surrendered more than 40 percent of its value this year, is only a preview of debt problems that could engulf countries such as Brazil, South Africa, Russia and Indonesia, some economists say.
“Turkey is not the last one,” said Sebnem Kalemli-Ozcan, an economics professor at the University of Maryland. “Turkey is the beginning.”
Total debt is a whopping $169 trillion, up from $97 trillion on the eve of the Great Recession, according to the McKinsey Global Institute.
While previous debt crises involved U.S. households and, later, profligate European governments such as Greece, this time the concern centers on companies in emerging markets that borrowed heavily in dollars and euros.
In Turkey, for example, companies and banks borrowed in recent years to finance bridges, hospitals, power plants and even a mammoth port development for cruise ships.
Foreign investors, particularly European banks, lent freely in search of the higher returns these markets offered at a time when the U.S. Federal Reserve and European Central Bank were keeping interest rates low.
“We were supposed to correct a debt bubble,” said David Rosenberg, chief economist at Gluskin Sheff, a wealth-management firm. “What we did instead was create more debt.”
Those bills are coming due, and Turkish borrowers, like those in other developing countries, may not have the dollars and euros to pay them back.
That is in part because the Fed is raising interest rates in the midst of a healthier U.S. economy. The stronger dollar - along with the sinking lira makes it increasingly expensive for Turkish borrowers to repay their dollar debts. Paying off a $100,000 loan at the start of this year would have required 379,000 lira. Now, that same loan would take more than 660,000 lira.
“The free money is going away,” said economist Tim Lee of Pi Economics, who has been warning of a potential Turkish crisis since 2011.
The situation could grow even more perilous. Money is fleeing Turkey and similar markets precisely when many of the loans their companies took out in recent years are coming due. Globally, a record total of up to $10 trillion in corporate bonds must be refinanced over the next five years, according to McKinsey.
Earlier this week, Moody’s cut its credit ratings on 20 Turkish financial institutions. The ratings agency cited “a substantial increase in the risk” that banks would struggle to finance normal operations.
The prospect of a new debt crisis is striking because the world has already seen two in the past 10 years.
Authorities in the United States and Europe took steps after the 2008 crisis to avoid a repeat episode.
U.S. regulators required banks to hold significantly more emergency reserves. U.S. consumers whittled down their debts. In Europe, authorities forced overspending governments to embrace austerity programs.