Eight years after the financial crisis, the world is suffering from a debt hangover of unprecedented proportions.
Gross debt in the non-financial sector has more than doubled in nominal terms since the turn of the century, reaching $152 trillion last year, and it’s still rising, the International Monetary Fund said. The figure includes debt held by governments, non-financial firms and households.
Current debt levels now sit at a record 225 percent of world gross domestic product, the IMF said Wednesday in its semi-annual Fiscal Monitor, noting that about two-thirds of the liabilities reside in the private sector. The rest of it is public debt, which has increased to 85 percent of GDP last year from below 70 percent.
Slow global growth is making it difficult to pay off the obligations, “setting the stage for a vicious feedback loop in which lower growth hampers deleveraging and the debt overhang exacerbates the slowdown,” said the Washington-based fund.
“Excessive private debt is a major headwind against the global recovery and a risk to financial stability,” IMF fiscal chief Vitor Gaspar said in prepared remarks. “History has taught us that it is very easy to underestimate the risks associated with private debt during the upswing.”
Much of the borrowing dates back to the boom in private debt that preceded the 2008 financial crisis, according to the IMF. While households and companies in advanced economies started to retrench following the crisis, the deleveraging has been uneven and in some instances debts kept rising, Gaspar said. Bad debts have ended up on government balance sheets.
Levels of private debt are now high in both advanced nations and a few large emerging markets such as China and Brazil that are considered systemically important to the global financial system.
The IMF flagged the euro area and China as economies where it’s particularly important for deleveraging to occur.