Learn more about market trends Assessing Global Debt

Assessing Global Debt

Since the financial crisis, global debt has risen to a new historic high relative to GDP. This could potentially imply that we are once again heading for a disruptive crisis in key countries or even globally. The following report attempts to assess this risk by investigating the debt issue from a broad range of angles.

The report’s key conclusion is that there appear to be a number of specific pockets of risk but that “systemic” instability seems less likely than often perceived. One of the key reasons is that leverage in our own sector, global banking, has receded markedly since the crisis, although there are some new areas of heightened financial sector leverage outside the formal banking system.

Many advanced economies as well as China have seen a marked rise in government, or government- related debt. Outright crisis risks nevertheless seem fairly moderate: market pressures impose longer-term discipline to some extent, while low real interest rates increase debt sustainability. Meanwhile China’s growth potential seems sufficient for leverage to be kept in check, albeit at the cost of some continued “financial repression.” A final area of heightened risk is non-financial corporate debt. Credit quality has, no doubt, suffered in certain market segments. But, even here, the report concludes that risks seem somewhat more limited than in the last period of serious stress, i.e. 2000 to 2002.

Clearly, all these conclusions are tentative in nature and must be continually revisited. Most importantly, significant political or economic shocks emanating from “outside” the debt markets per se could lead to sudden non-linear increases in risk.

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