Give world’s debt load a deep thought

The borrowing spree has started to boomerang, leading global economy to moan under a record pile of debt. On record, the world has continued to borrow since the 2008 financial crisis, adding nearly $60 trillion, pushing the worldwide debt load to $200 trillion in 2014, nearly three times the size of the entire global economy.
History has it that the last two major debt crises in some parts of the world rippled through the global economy. But it is not yet clear whether China’s looming slowdown will spread across the world. In the late 1990s, ballooning sovereign debt loads in Indonesia, Thailand, and South Korea, combined with a default by the Russian government kicked off the debt crises in emerging economies that required serious bailouts. Another cascade in 2008 saw the US subprime bust metastasize into the worst economic downturn since the Great Depression, infecting Europe with a sovereign debt crisis along the way.
Following the 2008 financial crisis, investors poured money into China, Brazil, and other emerging markets to take advantage of recovering commodity prices and faster-growing economies. The newfound wealth prompted the banks in these countries to unleash a wave of new credit to households and local companies.
But the fallout has been massive. Since 2009, the average level of private debt in emerging economies has gone from 75 percent of GDP to 125 percent, according to the Bank for International Settlements. Private debt levels in China and Brazil are now double the size of the national economy.
As a result, China’s debt has tripled since 2009 from $10 trillion to $30 trillion, according to McKinsey’s latest estimates. The biggest increases are in China’s corporate sector, where big state-owned companies gobbled up loans from big state-owned banks.
China’s debt crisis may not be contagious as Yuan is still not fully convertible, and most of the debt in China is held in local currency, which minimizes foreign exchange risks that were such a problem during the Asian crisis in the 1990s.
Most of China’s borrowing also takes place through traditional bank loans, rather than through the bond market, while bonds can spread out the pain of a default or a souring credit situation among lots of investors.
In case of China, the risk isn’t a debt implosion — it’s continued slow growth as Beijing focuses more resources on managing its debt rather than trying to reform or grow.
There are signs some countries may avert the brunt of economic slowdown in China. The IMF expects Indian GDP to rise by 7.3% in 2016, which will make it the world’s fastest-growing big economy. It is less affected by the slowdown in China than other Asian economies, and the halving in oil prices which has hit Asian producers like Malaysia hard has been a boon to India, which imports 80% of the oil it consumes.
In the immediate aftermath of 2007, many emerging economies benefited from the crisis, as the investors from the developed countries moved their capitals to benefit from booming economies, notably China. But the tables have now turned, with debt poised to exacerbate crises in some parts of the developing world and dent long-term prospects in others.
Regarding the global economic scene, the guards have changed. In the past, the rich world had the muscle to shake off such problems elsewhere. But emerging markets now make up most of the world economy (around 58% if exchange rates are measured at purchasing-power parity). This time round, the developing economies, are quite capable of weighing down rich-world recoveries — especially if, as in Europe, they are already fragile ones. Taking full account of the effects of emerging-market debt makes the world economy look far less secure.
Though the world is not protected from China’s looming debt crisis that ripped across the stock markets worldwide early this year, the world seems to be more prepared to avoid the harrowing experience of the World Financial Crisis.