Global Debt—Risks, Challenges and Opportunities
2014-11-13 12:21:00    source:    click:


Bank for International Settlements (BIS) warned that the world economy is just as vulnerable to a financial crisis as it was in 2007, with the added danger that debt ratios are now far higher and emerging markets have been drawn into the fire as well. Mr. Jaime Caruana, IFF Advisory Committee member and the General Manager of the BIS said that investors were ignoring the risk of monetary tightening in their voracious hunt for yield. “Markets seem to be considering only a very narrow spectrum of potential outcomes. They have become convinced that monetary conditions will remain easy for a long time, and may be taking more assurance than central banks wish to give.” Mr. Caruana believes the world economic system is, in many aspects, more fragile than it was, before the Lehman crisis. The flouring private credit industry in China, Brazil, Turkey and other emerging economies is the result of the spillover effect of Western countries’ QE. The long-term monetary stimulus policies in US, Europe and Japan have led to liquidity spillover affecting the rest of the world. Rising Asian countries could no longer act as a firebreak, and may themselves now be a source of risk.
Following are parts of the speeches:
Though we have not come to a conclusion on the answer to how much debt we have indeed, at least we can say for sure that we cannot relax too much with regard to the market unrest recent years. The years after 2007 crisis witnessed the continuous accumulation of global debt, which has reached an alarming proportion by now. Then the total amount of post-crisis debt, as a result of family, business and government add-up, has reached a daunting point as high as 40%. That’s the reason why I always say that we should concern about the critical point, beyond which can we never bear the “weight” of debt. Developed countries, where debts are mostly carried by governments, are not the only one that needs to pay high attention to debt problems. It is observed that many other countries have witnessed the ratio of debt to GDP surpassed 20-30%. Corporate debts may take a higher proportion in emerging economies. The pressure faced by countries may vary according to their own conditions. For example, household debt remains relatively high in the US, while countries like Britain and Spain might be more vulnerable to the impact of financial crisis turbulence. Theirs
On the other side, let us turn to banks. Since then banks has began to add capital and it can be seen that their debt growth has to slow down due to higher requirement of capital fund. So I think the debt issue is more severe than that in 2007 when the crisis just broke out.
Moreover, how should we respond to mounting debts? There’s no analysis framework that enables us to analyze interactive factors between the real economy and financial institutions. We might know the aggregate and some possible effect and mechanism which may cause volatility, but we lack a well-designed analysis framework to explain this. This means a kind of risk. We might not know enough of the co-movement in it and underestimate some debts or mechanisms in economies. For example, whether other countries will be influence by the debt problem in one country. We do not have scientific analysis and framework for such implicative effect.

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