Today in its semi-annual report Global Economic Prospect, the World Bank warned, again, of the risk of a new global debt crisis as a result of the biggest buildup in borrowing in the past 50 years. Of the four waves of debt accumulation since the 1970s, the current binge is by far the largest, fastest, and most far-reaching.
At the end of 2018 emerging market and developing economy debt reached 170% of GDP. The total at $55 trillion is an increase of 54 percentage points of GDP since 2010. China accounts for the bulk of the increase but other big emerging economies such as Brazil contributed to the total. The big increase in debt, the World Bank said, was a threat to the bank’s forecast of a slight pickup in global growth in 2020 to 2.5% from 2.4% in 2019. That forecast depend on better performance from emerging economies such as Argentina, Mexico, and Turkey.
“This rebound is not broad-based; instead it assumes improved performance of a small number of large economies, some of which are emerging from a period of substantial weakness. About a third of emerging market and developing economies are projected to decelerate this year due to weaker-than-expected exports and investment,” the World Bank report said.
In recent history, the World Bank noted, each financial crash has been preceded by a big increase in debt.
And the debt problem now may be even worse than the astounding total suggests. The build-up since 2010 has been concentrated in emerging and developing countries rather than in advanced nations. In about 80% of emerging and developing economies total debt was higher in 2018 than in 2010 This time too, unlike say the 1980s debt crisis in Latin America, the build up isn’t region specific, which will make it harder to contain any crash. More than a third of emerging and developing economies had experienced an increase in debt of at least 20 percentage points of GDP. In addition, debt accumulation had been in both the public and private sectors, which contrasted with past waves when the build-up was either by the government or private firms.
“Low global interest rates provide only a precarious protection against financial crises,” said Ayhan Kose, a World Bank official. “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.”
Don’t know about you but I don’t see those policy improvements whether its pension debt in Brazil or out of control deficits in Washington.
In a related story, Bloomberg reports this morning that companies around the world are rushing to borrow cheaply while they still can. One impetus is worry that tensions between the United States and China would upend the curret favorable environment for selling debt. But the overarching feeling is that conditions for selling debt don’t get any better than this.
Corporations have sold more than $47 billion in notes in the United States through Wednesday, January 8. That’s about 60% above note sales in the same period of 2019. In Europe, investment-grade and junk bond sales including company and country debt broke a 79 billion-euro ($88 billion) weekly set a year ago, Bloomberg reports. And in Asia outside Japan, there have been more than $12 billion of sales, a record start for the year.
At the least these two stories argue that the peak time to buy emerging market and non-investment grade corporate debt has passed. What worries me is that I’m still seeing lots of recommendations from on and off Wall Street urging individual investors to buy these asset classes.
Please remember the Wall Street wisdom that says that individual investors are the last to know and that one part of the safety net for institutional investors is that they can always sell to individual investors when they need to dump risk.