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Rising intra-firm corporate debt poses stability risks

Thursday, July 4, 2019

Subject

Global debt risks.

Significance

Global indebtedness is slowly declining -- down to 234% of GDP in 2018, after rising from 202% of GDP in 2008 to peak at 245% of GDP in 2017. The drop is consistent across the household, corporate and government sectors in both advanced and emerging economies. Ultra-low interest rates and abundant liquidity provided by unconventional monetary policies drove the increase in advanced economies. Expansionary domestic policies, subdued inflation and liquidity from advanced economies searching for yield encouraged emerging economies' indebtedness.

Impacts

  • Research shows that only 33% of credit booms end in crisis, but deleveraging in most major economies will nonetheless dampen growth.
  • High-risk structured financial products and lending by ‘shadow’ non-bank channels has surged, raising the risk of panic in a downturn.
  • Global average household debt is moderate, but pockets of risk include nations with booming property prices or student loan markets.
  • In low-to-lower-mid-income emerging nations, exchange rate risk is very high as 80% of cross-border loans are dollar-denominated.
  • Fears about China risk masking other nations; debt-to-GDP in other emerging economies is growing faster than advanced nations' debts.
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