Debt hangover just gets worse

Eight years after the financial crisis, the world suffers from a debt hangover of record dimensions.

Non-financial sector gross debt more than doubled nominally since the turn of the century, hitting $152-trillion last year and it's rising. This includes debt held by governments, non-financial firms and households.

Current debt was a record 225% of world GDP, the IMF's Fiscal Monitor said yesterday. Two-thirds were in the private sector and the rest was public debt, which rose to 85% of GDP last year from below 70%.

Slow global growth made it hard to repay debt, "setting the stage for a vicious feedback loop in which lower growth hampers de-leveraging and the debt overhang exacerbates the slowdown".

IMF fiscal chief Vitor Gaspar said: "Excessive private debt is a major headwind against the global recovery and a risk to financial stability.

"History has taught us that it is very easy to underestimate the risks associated with private debt during the upswing."

Global policy makers are urged to use fiscal policy to boost growth as the ability of central banks to stimulate economies wanes. Finance chiefs and central bankers of the IMF's 189 member nations meet this week in Washington for the AGM of the fund, founded to oversee the world monetary system.

The IMF says much of the borrowing dates back to the private-debt boom before the 2008 financial crisis. Companies in advanced economies started retrenching after the crisis, but de-leveraging had been uneven. Some debt kept rising, Gaspar said. Bad debt ended up on government balance sheets. Low interest rates drove a surge in corporate debt in emerging markets.

Private debt is high in advanced nations and a few large emerging markets such as China and Brazil.

Firms putting off debt repayment could become sensitive to shocks, raising the risk of abrupt de-leveraging, the IMF said. Depressed economies with weak banking systems should avoid premature fiscal-policy tightening. Governments could speed "voluntary" restructuring of private debt with measures like subsidising creditors to lengthen maturities.