Ungated Post | 06 Nov 2017

Mapping global debt danger zones as alert sounds over credit trigger for a new crisis

Ten years on from the global financial crisis, and eyes are peeled for triggers for a new world economic upheaval.  And chief among the prime suspects is debt, and especially household debt.

Last month, the International Monetary Fund highlighted the danger from big increases in both the level of household debt and the pace at which it is rising in many key economies.  “Higher household debt is associated with a greater probability of a banking crisis, especially when debt is already high, and with greater risk of declines in bank equity prices,” the Fund warned in its influential Global Financial Stability Report.

Building on the IMF’s analysis, Oxford Economics has put the debt bogeyman under the spotlight.

We investigated just how great the risks really are, and just where they may lie, country by country, creating a global risk map to identify the debt danger zones to the world economy.  This goes beyond the Fund’s study which while looking at 80 economies and across 25 years of data stopped short of naming the countries where the risks loom largest.

Our risk map identifies ten countries where the danger from household debt is flashing red and the threat of this leading to financial crisis and economic upset.

Overall, though, we found that the medium-term risks from a rising household debt burden are less severe globally than the IMF’s suggested. The present low interest rate environment, improved policy regimes with tougher scrutiny of banks by regulator and watchdogs, and lower balance sheet risks relative to a decade ago all mean we are more sanguine on the worldwide implications that the Fund. We concluded that global credit risks are much less systemic than 10 years back – especially in the larger advanced economies.

But important pockets of vulnerability to debt danger also emerged in our analysis – especially in high-yield (riskier) corporate debt and US commercial property.

The countries where we found the greatest specific concern meanwhile were Australia, Canada, Korea, Norway and Switzerland where household debt is rising at exceptionally fast rates from already elevated levels.

We also concluded that there has been a major rotation of global credit risks so that debt has been rising faster than the trend level of economic growth in emerging markets over recent years whereas in 2007 rapid credit growth was prevalent in the major developed world economies.

Read the full report

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