As Global Debt Hits A Record $247 Trillion, The IIF Issues A Warning

Every quarter the Institute of International Finance publishes a new number of the total amount of global debt outstanding, and every quarter the result is the same: a new record high

Today was no exception: according to the IIF’s latest Global Debt Monitor, the amount of debt held in the world rose by the biggest amount in two years during the first quarter of 2018, when it grew by $8 trillion to hit a new all time high of $247 trillion, up from $238 trillion as of Dec. 31, 2017 and up from by $30 trillion from the end of 2016.

In other words, there is now a quarter quadrillion dollars in global debt, and it represents 318% of global GDP. More concerning is that this was the first time since Q3 2016 that global debt to GDP increased, suggesting that the marginal utility of debt is once again below 1.

This is how the debt is broken down as of Q1 2018 and compared to Q1 2013:

  • Non-financial corporate debt: $74 trillion, up from $58 trillion in 5 years
  • Government debt: $67 trillion, up from $56 trillion
  • Financial debt: $61 trillion, up from $56 trillion
  • Household debt: $47 trillion, up from $40 trillion

And visually:

Some more details from the report, via Bloomberg:

  • The government debt-to-GDP ratio has surged to 101 percent in the U.S.
  • Non-financial corporate debt is now at record highs in Canada, France and Switzerland
  • Household indebtedness in China, Chile and Colombia grew over 3% since Q1 2017, topping 49%, 46% and 30%, respectively.

What was surprising about the report – certainly not the latest all time high debt numbers, those are now standard – is that the IIF voiced a strongly negative opinion of recent developments in the debt arena.

“The pace is indeed a cause for concern,” warned IIF’s Managing Director Hung Tran during a call with reporters. “The problem with the pace and speed is if you borrow or if you lend very quickly, the quality of the credit tends to suffer.” It also means more governments, businesses and individuals have been borrowing that could have trouble paying the money back, or merely paying interest on it as rates rise.

“The quality of creditworthiness has declined sharply,” Tran added ominously, echoing what Moody’s said at the end of May.

The IIF did not stop there and cautioned that with global growth losing steam and becoming increasingly divergent, and with U.S. rates rising, worries about credit risk are starting to creep back to the forefront, including in many developed economies, such as the United States and Western Europe.

The IIF also said that while the amount of debt outstanding is not necessarily a concern because it can be rolled over and refinanced – provided there is no sharp economic slowdown – they stressed that developments in the US were especially worrisome for the global growth picture, as in addition to increasing debt at a faster pace the country is also raising interest rates, causing the cost of borrowing to rise and potentially leading to a surge in defaults.

Underscoring the growing debt threat, IIF’s senior director Sonja Gibbs said that there was an increased risk of sovereign debt crises in a select few developed markets as a result of the increase of debt and financing costs:

“Government debt is higher than it was prior to the crisis and corporate debt as well. This may be slightly overlooked.”

Speaking to Yahoo Finance, Gibbs added that the United States’ debt growth was particularly worrisome, where it was now more than 100% of GDP. She explained that with the surge in deficit spending under President Trump fiscal stimulus, the U.S. will now have funding needs of 25% of its GDP.

“The U.S. really stands out here because … a lot of that is the expanding budget deficit as well as maturing debt,” Gibbs said. “That’s a lot of financing need affecting the market.”

For now that need has been largely ignored by the market however, and in fact, according to Harley Bassman, the lack of an increase in longer yields is a “signal that an iceberg is dead head” as it suggest the Fed is losing control of interest rates amid a broad flattening of the yield curve.

Finally, if developed markets don’t get you, then emerging markets just may: the IIF also raised concern that total emerging market debt (ex-financials) rose by $2.5 trillion to a new record of $58.5 trillion in Q1. As Bloomberg reports, on Monday, the World Bank’s CEO Kristalina Georgieva said that “with interest rates going up, attention on debt sustainability has to be stronger.”

Narrowing down the EM risk, the IIF said that government debt has seen the biggest increase in Brazil, Saudi Arabia, Nigeria and Argentina, with dollar refinancing risk particularly high for Argentina and Nigeria, where over three-quarters of redemptions will be in dollars. About $900 billion is in U.S. dollar-dominated emerging bonds/syndicated loans that will mature by 2020. And the higher the dollar rises, the more likely it is that one or more of these countries will be forced to default on its debt.

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Author: Tyler Durden

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