Inventive policymaking has only made the problem worse, guaranteeing that any eventual restructuring will be all the more painful.
By Satyajit Das and cross-posted from Bloomberg.com
Markets, to paraphrase Nobel prize-winning economist Thomas Schelling, often forget that they keep forgetting. That’s especially true when it comes to the intractable challenges posed by global debt.
Since 2008, governments around the world have looked for relatively painless ways to lower high debt levels, a central cause of the last crisis. Cutting interest rates to zero or below made borrowing easier to service. Quantitative easing and central bank support made it easier to buy debt. Engineered increases in asset prices raised collateral values, reducing pressure on distressed borrowers and banks.
All these policies, however, avoided the need to deleverage. In fact, they actually increased borrowing, especially demand for risky debt, as income-starved investors looked farther and farther afield for returns. Since 2007, global debt has increased from $167 trillion ($113 trillion excluding financial institutions) to $247 trillion ($187 trillion excluding financial institutions). Total debt levels are 320 percent of global GDP, an increase of around 40 percent over the last decade.
All forms of borrowing have increased — household, corporate and government. Public debt had to grow dramatically to finance rescue efforts after the Great Recession. U.S. government debt is approaching $22 trillion, up from around $9 trillion a decade ago — an increase of 40 percent of GDP. Emerging market debt has grown as well. China’s non-financial debt has increased from $2 trillion in 2000 (120 percent of GDP) to $7 trillion in 2007 (160 percent of GDP) to around $40 trillion today (250 percent of GDP).
U.S. non-financial corporate borrowing as a share of GDP has surpassed 2007 levels and is nearing a post-World War Two high. Meanwhile, the quality of that debt has declined. BBB-rated bonds (the lowest investment-grade category) now account for half of all investment-grade debt in the U.S. and Europe, up from 35 percent and 19 percent, respectively, a decade ago. Outstanding of CCC-rated debt (one step above default) is currently 65 percent above 2007 levels. Leveraged debt outstanding (which includes high-yield bonds and leveraged loans) stands at around $3 trillion, double the 2007 level.
Today, the world doesn’t have many options left…