Advertisement
Global monetary policy
OpinionComment
Anthony Rowley
Anthony Rowley

Macroscope | Looming global debt crisis: reasons to worry about the elephant in the room

  • The mountain of global debt has grown to record size in the past decade but has gone largely unnoticed as governments keep spending and printing money
  • Global financial institutions are now sounding the alarm, but governments and central banks are in no mood to listen

Reading Time:3 minutes
Why you can trust SCMP
4
US President Joe Biden speaks during a visit to a family farm in Kankakee, Illinois, US, on May 11. Biden, seeking to undercut the climbing cost of food, will propose new measures to reduce costs for US farmers. Photo: Bloomberg
Anthony Rowley

“We live in dangerous times,” two senior International Monetary Fund economists wrote in a recent blog. Few would challenge that assessment as the world confronts the multiple threats of possible nuclear conflict, galloping inflation, rising interest rates, economic recession and the ongoing Covid-19 pandemic.

Advertisement
But it was a more specific danger to which the IMF officials were referring. It was a new global debt – and maybe financial system – crisis erupting in public and private sectors of the global economy and in both advanced and emerging economies, the latter initially.

Debt crises have a way of keeping their heads below the parapet until they attack, but once they do so it is often with great ferocity. As World Bank chief economist Carmen Reinhart put it, “Prior to crises, it’s often the things that you don’t see that ultimately get you.”

Debt mountains such as the one we have now are the elephants in the room. They are huge but often go unnoticed or unacknowledged. This one had reached US$303 trillion – some three times the size of global annual GDP – by the end of 2021, according to the Institute of International Finance.

It has been growing for a decade or more, so why is there “reason to worry” now, as a recent IMF report on global debt suggested? One reason is the growth of the sovereign bank nexus or “doom loop”, whereby banks become holders of government debt to a point where their viability is at risk.

Banks’ holdings of sovereign debt have risen to record levels as governments have undertaken spending to cushion the impact of the pandemic. This is increasing “the odds that pressures on public-sector finances could threaten financial stability”, as the IMF has observed.
loading
Advertisement