Central bankers and policy makers from ECB president Christine Lagarde to the IMF have been urging governments to do more, arguing it’s a good time to borrow for projects that will reap economic dividends. (Photo: Pradeep Gaur/Mint)
Central bankers and policy makers from ECB president Christine Lagarde to the IMF have been urging governments to do more, arguing it’s a good time to borrow for projects that will reap economic dividends. (Photo: Pradeep Gaur/Mint)

Way out for a debt-laden world? Yet more debt

  • A decade of easy money has left the world with a record $250 trillion of government, corporate and household debt
  • Rock bottom interest rates in the years since has kept the burden manageable for most, allowing the debt mountain to keep growing

Zombie companies in China. Crippling student bills in America. Sky-high mortgages in Australia. Another default scare in Argentina.

A decade of easy money has left the world with a record $250 trillion of government, corporate and household debt. That’s almost three times global economic output and equates to about $32,500 for every man, woman and child on earth.

Much of that legacy stems from policy makers’ deliberate efforts to use borrowing to keep the global economy afloat in the wake of the financial crisis. Rock bottom interest rates in the years since has kept the burden manageable for most, allowing the debt mountain to keep growing.

Now, as policy makers grapple with the slowest growth since that era, a suite of options on how to revive their economies share a common denominator: yet more debt. From Green New Deals to Modern Monetary Theory, proponents of deficit spending argue central banks are exhausted and that massive fiscal spending is needed to yank companies and households out of their funk.

Fiscal hawks argue such proposals will merely sow the seeds for more trouble. But the needle seems to be shifting on how much debt an economy can safely carry.

Central bankers and policy makers from European Central Bank President Christine Lagarde to the International Monetary Fund have been urging governments to do more, arguing it’s a good time to borrow for projects that will reap economic dividends. “Previous conventional wisdom about advanced economy speed limits regarding debt to GDP ratios may be changing," said Mark Sobel, a former US Treasury and International Monetary Fund official. “Given lower interest bills and markets’ pent-up demand for safe assets, major advanced economies may well be able to sustain higher debt loads."

A constraint for policy makers, though, is the legacy of past spending as pockets of credit stress litter the globe.

At the sovereign level, Argentina’s newly elected government has promised to renegotiate a record $56 billion credit line with the IMF, stoking memories of the nation’s economic collapse and debt default in 2001. Turkey, South Africa and others have also had scares.

As for corporate debt, American companies alone account for around 70% of this year’s total corporate defaults even amid a record economic expansion. And in China, companies defaulting in the onshore market are likely to hit a record next year, according to S&P Global Ratings.

So called zombie companies—firms that are unable to cover debt servicing costs from operating profits over an extended period and have muted growth prospects—have risen to around 6% of non-financial listed shares in advanced economies, a multi-decade high, according to the Bank for International Settlements. That hurts both healthier competitors and productivity.

As for households, Australia and South Korea rank among the most indebted. The debt drag is hanging over the next generation of workers too. In the US, students now owe $1.5 trillion and are struggling to pay it off. Even if debt is cheap, it can be tough to escape once the load gets too heavy. While solid economic growth is the easiest way out, that isn’t always forthcoming. Instead, policy makers have to navigate balances and trade offs between austerity, financial repression where savers subsidize borrowers, or default and debt forgiveness.

“Debt is not a problem as long as it is sustainable,“ said Alicia Garcia Herrero, chief Asia-Pacific economist at Natixis SA in Hong Kong, who previously worked for the European Central Bank and Bank of Spain. “The issue is whether the massive generation of debt since the global financial crisis is going to turn out to be profitable."

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