The macroeconomic evolution
Central bankers warn about “the debt trap”
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World debt triples GDP and is 35% higher than in 2007
The Basel-based BIS warns of the risks of debt to the global economy (Harold Cunningham / Getty) Share on Facebook Share on Twitter Share on Whatsapp 0 > 06/25/2018 01:55 | Updated 06/25/2018 09:24 Related topics
- Public debt
- Financial crisis
- Risk premium
- Agustin Carstens
Ten years after the global financial crisis , central banks “can feel satisfied” to have redirected the world economy towards a synchronized and robust recovery . It is the valuation -perhaps a bit self-congratulatory- of Agustín Carstens , ex- Governor of the Bank of Mexico and new Managing Director of the Bank of International Settlements (BIS) that brings together all the main central bankers of the world. Carstens took stock of the last decade of monetary expansion in the presentation this week in Basel of the annual economic report of the BIS . “Central banks are left alone to solve the problem; we threw ourselves into the pool because nobody else was doing much, “he said.
But the radical response of central banks has passed a huge bill. After several interest rate cuts to zero or even less and the so-called monetary quantitative easing , the BIS warns in a new report that the markets have once again lost their ability to calculate risk . Credit in the private sector grows out of control . Risk premiums have fallen to levels that do not correspond to the reality of the insolvency risk. The spreads between low and high risk debt have narrowed irrationally , and, a decade after the big puncture, there are signs of new bubbles in the real estate markets like the United States, where prices are “close to the maximums of before of the global crisis of 2008, “warns the aforementioned report.
The historical record of global indebtedness is due to low interest rates
Many of the signs of excessive financial joy have returned although the BIS insists that there is not the same danger of crisis as then. But with the highest debt levels in history, central bankers are well aware that the next challenge – raising rates without triggering a crisis – will be the hardest of all. According to the calculations of the BIS, the world debt already exceeds 170 trillion dollars (146 trillion euros), three times more than the world GDP and 35% more than its already exorbitant level before the crisis.
This creates the danger of a “debt trap” – the report warns – an epic dilemma in which central banks may be reluctant to raise rates because of the danger of provoking a crisis despite knowing that low rates create incentives for unstoppable expansion Of the debt. Before and after the crisis “the trend (of debt expansion) coincides with a long-term decline in interest rates,” he says.
Fears of a deflationary stalemate have not been fulfilled
The expansion of private debt – both mortgage and business – triggered the catastrophe 10 years ago and remains a problem. The BIS warns of “the deterioration of the balance sheets of non-banking companies in the United States. , the United Kingdom and to a lesser extent Franca and other European countries “.
Now the public debt has been added to the problem, whose expansion in the last decade has been necessary, as well as monetary policy, to avoid an economic depression. However, this stratospheric debt creates “medium-term material risks” that reflect precisely
“The excessive dependence of the recovery of the monetary policy”.
A crisis could be triggered by different factors. “An intensification of tensions over free trade, if perceived as a threat to the global trading system, could have a very significant impact,” central banks warn. In the international bond market, a snapback of interest rates – the rapid and unexpected reversal of interest rates at historical levels – caused by an inflationary turn would be very destabilizing. In addition, the BIS warns of “a sharp drop in risk appetite” in the financial markets.
The first signs of the impact of rate hikes in emerging markets have already been seen. These have suffered a flight of capital for about 8,500 million dollars (7,300 million euros) in the last ten days (according to the Institute of International Finance, in Washington). The debt of emerging economies such as Mexico, Turkey and China has been a profitable investment for global investors who have entered fully into emerging local markets. According to the BIP, loans provided in dollars to companies and individuals in developing countries have doubled since 2008 to 3.6 trillion dollars (3.1 trillion euros). They grew no less than 8% in 2017. But expectations of US rate hikes. and a strong appreciation of the dollar has caused a massive exit in recent weeks. Fortunately, the foreign exchange reserves of countries such as Brazil, Mexico and China are very high.
The debt trap generates many paradoxes. “The normalization of monetary policy is essential” to “stop the expansion of debt,” the report explains. But, rate hikes can reactivate the risk of deflation, a poisonous recipe for a highly indebted economy. “Given the high levels of debt and low inflation in many countries, the path for monetary policy is quite narrow,” central bankers warn.
For the moment, however, the fears of two and three years ago about a structural deflationary stalemate have not been fulfilled. The world economy is going through a vintage moment of robust growth and synchronized in the large economic blocks, explains the report. With the exception of some emerging economies, there is no deceleration or strong inflationary pressures despite the historically low levels of unemployment in the US. This is unusual. “It is not common to anticipate such strong growth at such an advanced stage of an expansion,” says the BIS. It is another indication that the times are not normal at all.