The International Monetary Fund has urged governments to take action to tackle a record $152tn debt mountain before it triggers a fresh global financial and economic crisis.
Warning that debt levels were not just high but rising, the IMF said it was vital to intervene early in order to mitigate the risks of a repeat of the damaging events that began with the collapse of the US sub-prime housing bubble almost a decade ago.
It said that new research in its half-yearly fiscal monitor covering 113 countries had shown that debt was currently 225% of global GDP, with the private sector responsible for two-thirds of the total.
Vitor Gaspar, the director of the IMF’s fiscal affairs department said: “$152tn is a record high. In places around the world we have excessive debt. In some places we have debt, in particular non-financial corporations’ debt, growing very fast.
“A crucial message from the fiscal monitor is that when private debt is on an unsustainable path it is important to intervene early on in the process to make sure financial crises and recessions can be prevented.”
The IMF says fiscal policy, the power governments have over tax and spending, could help. It suggests government-led programmes to restructure debt and tax breaks to persuade creditors to lengthen repayment periods.
Central banks have borne the brunt of attempts to boost growth for the past eight years, but the IMF said more active use of fiscal policy would provide a better mix. Excessive private debt was making global recovery more difficult and had increased the risk of financial instability. Rapid rises in private debt often led to financial-sector triggered recessions which were longer and deeper than normal downturns.
Gaspar said debt was unevenly spread and concentrated in the advanced countries of the west and some of the big emerging market economies such asChina. He advised countries where it posed a risk to financial stability to be proactive and intervene early.
The IMF’s report shows that the overall debt level has not fallen since the financial crisis and recession of 2007-09, despite the fact that the most severe downturn of the post-war era was the consequence of too much reckless borrowing.
Debt levels were high at the end of the second world war, but decades of strong growth and moderate inflation led to a steady decline in debt to GDP ratios.
Gaspar said that the reason debt levels were now higher than they were before the 2007-09 crisis was that economic growth had been so weak. Faster US expansion since the crisis had resulted in a much sharper decline in private indebtedness than in the eurozone, he added.
Some countries, including the UK, have seen a decline in non-financial private sector debt since the world economy fell into recession in 2008. But the IMF expressed concern about the rapid growth of China’s private sector debt to GDP ratio, up 70 percentage points between 2008 and 2015.
“China is so large and the debt of non-financial corporations is growing so fast that it is having significant effects on global trends,” Gaspar said.