The World Bank is warning of an impending and massive global debt crisis it claims won't be mitigated this time by low interest rates and generous financial stimulus packages.
"Low global interest rates provide only a precarious protection against financial crises," said Ayhan Kose, director of the World Bank's Prospects Group, in the bank's biannual Global Economic Prospects (GEP) report released late Wednesday.
"The history of past waves of debt accumulation shows that these waves tend to have unhappy endings. In a fragile global environment, policy improvements are critical to minimize the risks associated with the current debt wave."
The waves Kose talked about refer to what the bank says are "four waves of debt accumulation" over the last 50 years. The current wave, which is the fourth, started in 2010 and is considered "the largest, fastest and most broad-based increase" in global borrowing since the 1970s. The bank says the "fourth wave" of global debt has many similarities to the previous three. These similarities include a changing global financial environment, mounting vulnerabilities and warnings about the inefficient use of borrowed funds.
The first three waves of broad-based global debt accumulation lasted from 1970 to 1989, 1990 to 2001 and 2002 to 2009. The World Bank warned that while low levels of interest rates mitigate some of the risks associated with high debt levels, the previous three waves all ended with financial crises in many developing and emerging economies.
According to the GEP, debt is fast rising in emerging countries. It said more than a third of emerging and developing economies saw an increase in debt of at least 20 percentage points of GDP. Debt accumulation has been in both the public and private sectors. This contrasts with past waves when the build-up was either by the government or private firms.
In 80% of emerging and developing economies, total debt was higher in 2018 than in 2010. The bank said these countries are "navigating dangerous waters" because the current wave of borrowing coincides with a decade of repeated growth disappointments. Heavily indebted countries now weaker growth prospects in a fragile global economy that's also slowing down.
In 2018, global debt climbed to a record high of about 230% of gross domestic product (GDP). The World Bank said total debt from emerging and developing economies reached an all-time high of almost 170% of GDP. This was a substantial increase of 54 percentage points of GDP since 2010. China accounted for the bulk of this huge debt build-up.
The bank said there are four policy options for countries planning to reduce the likelihood of the current global debt wave ending in a crisis. The first is sound debt management and debt transparency to reduce borrowing costs and contain fiscal risks. The second is strong monetary, exchange rate and fiscal policy frameworks to safeguard developing and emerging economies in a fragile economic environment.
The third is robust financial sector regulation and supervision to recognize and tackle emerging risks. The fourth is effective public finance management and policies that promote good corporate governance. This measure can help ensure debt is used productively.
