How the global debt pile rose to ‘eye-watering’ levels

The world is racking up a record level of debt, much of it driven by emerging markets. But with interest rates in the U.S. heading up, the excessive reliance on easy money to drive economic growth can backfire on countries that depend on money flows from abroad.
The global debt pile has climbed to $215 trillion in 2016, an increase of $70 trillion from a decade ago, according to a report published Monday by the International Institute of Finance.

Once minor players in global lending markets, developing-market nations have benefited from international investors willing to invest in assets from markets perceived as riskier in search of relatively richer returns, or income, as ultralow and subzero interest rates from quantitative easing snatched away easy returns from safe assets like U.S. Treasurys.

The published findings confirms worries that the global economy has binged on debt, even if the usual suspects may have changed. Most of the recent concern among investors over growing debt levels has been targeted toward the high-income countries of the West.

The U.S. has continued to bump against the debt ceiling, raising concerns that it will no longer have the economic or political wherewithal to pay back the interest and principal on its debt. Greece has struggled to pay its creditors, and Italy is trying to bail out its big banks saddled with bad loans.

In fact, much of this precipitous rise has come from emerging markets. In the past decade, emerging markets have issued $40 trillion of additional debt.

“Higher domestic rates and a stronger U.S. dollar pose headwinds for those emerging markets with a debt-driven growth model,” wrote the authors of the report, titled “Eye-watering rise in debt levels.”

A tightening interest-rate cycle in the U.S. can result in a pull-back in portfolio flows, sparking a credit crunch. And a rising U.S. currency can make it more expensive for overseas borrowers to pay back investors in dollars when the money earned to pay back the interest is denominated in a weakening currency.

Particularly worrying is the rapid growth in corporate credit. Principal culprits of the boom in corporate lending include China, Turkey and Saudi Arabia. Bonds from such issuers have already been hit by a combination of slowing growth, heightening political turmoil and dipping energy prices.

Though an accumulating debt mound can trouble investors concerned over possible defaults, the credit profile for emerging markets has improved as corporate credit grades have recovered since the first half of 2016, according to an average of S&P’s, Moody’s and Fitch’s ratings compiled by Bloomberg.

Market Watch
4/5/2017