Debt ratios have reached extreme levels across all major regions of the global economy, leaving the financial system acutely vulnerable to monetary tightening by the US Federal Reserve, the world’s top financial watchdog has warned.
The Bank for International Settlements said the wild market ructions of recent weeks and capital outflows from China are warning signs that the massive build-up in credit is coming back to haunt, compounded by worries that policymakers may be struggling to control events.
“We are not seeing isolated tremors, but the release of pressure that has gradually accumulated over the years along major fault lines,” said Claudio Borio, the bank’s chief economist.
The Swiss-based BIS said total debt ratios are now significantly higher than they were at the peak of the last credit cycle in 2007, just before the onset of global financial crisis.
Combined public and private debt has jumped by 36 percentage points since then to 265pc of GDP in the the developed economies.
This time emerging markets have been drawn into the credit spree as well. Total debt has spiked 50 points to 167pc, and even higher to 235pc in China, a pace of credit growth that has almost always preceded major financial crises in the past.
Adding to the toxic mix, off-shore borrowing in US dollars has reached a record $9.6 trillion, chiefly due to leakage effects of zero interest rates and quantitative easing (QE) in the US. This has set the stage for a worldwide dollar squeeze as the Fed reverses course and starts to drain dollar liquidity from global markets.
SOURCE: Ambrose Evans-Pritchard