Private-sector corporates are responsible for two-thirds of the world’s $152 trillion debt mountain, according to a major announcement from the International Monetary Fund (IMF).
Highlighted in the organisation’s latest half-year Fiscal Monitor, the figure is equivalent to 225% of global GDP: a record high.
Unveiling the Monitor’s findings, Vitor Gaspar – director of the IMF’s Fiscal Affairs Department – explained that debt is not high everywhere. “Private debt,” he noted, “is concentrated in advanced and a few emerging-market economies.
“In advanced economies, which were at the epicentre of the global financial crisis, deleveraging has been uneven, and in many cases private debt has continued rising. Public debt has also surged in these countries – partly due to the migration of bad debt of the private sector into the government balance sheet.”
Gaspar added: “Private debt is also high in some systemic emerging markets economies, including China. At the other end, debt levels in low-income countries are generally low, but have been on the rise recently.”
That sharp diversity of debt levels across countries, he said, “is a reminder of the need to tailor policy diagnosis and prescription to the specific conditions prevailing in each country: no one size fits all”.
Combating the debt malaise, he stressed, requires a “comprehensive, consistent and coordinated” approach, using all three policy “prongs”: monetary, fiscal and structural.”
Governments of emerging-market and low-income countries, Gaspar pointed out, should focus on growth-friendly fiscal policy. “In some of these countries,” he said, “fiscal deficits have increased rapidly over the past year on the back of lower commodity prices and a less supportive global environment.
“While the adjustment in many of these countries is inevitable, the speed of adjustment will depend on available buffers. Improving the quality of public finances and strengthening fiscal frameworks would enhance policy credibility and resilience.”
Published on 5 October, the Fiscal Monitor emerged on the same day as the IMF’s latest Global Financial Stability Report. Announcing the latter, Peter Dattels – director of the body’s Monetary and Capital Markets Department, warned that medium-term risks to financial stability are building.
“We are entering a new era, characterised by chronic weak growth, prolonged low interest rates, and growing political and policy uncertainty,” he said. “This could undermine the health of financial institutions and add to the forces of economic and financial stagnation.”
Since the crisis, the IMF noted, “enhanced regulation and oversight have strengthened banks’ capital and liquidity buffers, making them safer. However, this new era of low growth and low rates threatens to undermine these gains”.
The organisation added: “Markets have serious concerns about the ability of many banks to remain viable and healthy, and whether economic recovery is sufficient to restore sustainable profitability.” As such, it warned, tough decisions await financial services providers – particularly those in Europe and China.
In Europe, the IMF noted, it is imperative for banks to resolve the region’s legacy of non-performing loans (NPLs): a measure requiring supportive policies designed to strengthen insolvency and recovery regimes, and cut foreclosure times.
If that were achieved, the IMF said, it would turn a capital cost of removing NPLs of about €80bn into a capital benefit of about €60bn. The finance group also urges that:
According to the IMF’s calculations, undertaking those structural reforms would improve profitability in European banks by more than $40bn annually. And combined with a cyclical recovery, the changes would improve the share of healthy European banks to more than 70%.
Turning to China, the body warned that credit there continues to grow rapidly. An increasing share of that credit, it said, “is being packaged into complex and opaque credit products, proliferating outside of the traditional banking sector.
“These credit products are ending up on smaller Chinese banks’ balance sheets, with exposure that, in many cases, far exceeds their capital, adding to financial system risks from highly indebted corporates.”
In the IMF’s view, those developments suggest that the Chinese financial system is growing more complex – but also more vulnerable. “Policymakers need to build on their reform progress to address promptly the corporate debt overhang and curb excessive credit growth, including for riskier credit products,” it said.