Below is our translation of an analysis from RIA Novosti. Our translation indicates that an unwieldy debt bomb could explode at any moment and send the world economy into a tailspin. On the other hand, some expect the US monetary system to implode at any moment, although a thoughtful analysis at Southfront seems to indicate that the Fed can postpone a US-side economic crisis long enough for Trump to be re-elected in 2020 but after that, all bets are off.
The Southfront analysis does say that the trade war could trigger an event that even the Fed with its bag of tricks would be hard put to manage, but it also says that China and the EU probably have the means to deal with such “US-induced shocks.”
We shall see.
The bomb is about to explode: global debt has reached $ 246 trillion
Aug 2, 2019
MOSCOW, August 2 - RIA Novosti, Natalia Dembinskaya. World debt has reached $246 trillion. This is an absolute record, more than three times global GDP - the cost of all products and services on the planet. Economists have warned that when a multi-trillion bomb, planted under the global economy, explodes, the crisis will break out worse than in 2008. RIA Novosti reports why the situation under which the fuses have already been lit is close to critical and whether it will be possible to avoid a general collapse.
Where does so much debt come from?
As follows from a report published by the Institute of International Finance (IIF), in the first quarter, global debt increased by three trillion dollars compared to the same period last year and set another record: 246 trillion. This is almost 320% of global GDP.
In developed countries, the volume of liabilities increased by 1.6 trillion – to 177 trillion. The main contribution has traditionally been made by the United States, where debt reached 69 trillion. Of these, 22 trillion are government loans that continue to accumulate thanks to the irrepressible appetites of the federal government.
In July, the US Bipartisan Policy Centre (BPC) recalled that the United States faces default in September if congressmen once again do not raise the national debt ceiling. It was increased. And they delayed the following restrictions for two years - until July 31, 2021. That is, they allowed the government to easily acquire more debt. According to the calculations of the US Treasury Department, current borrowings will exceed a trillion for the second year in a row.
IIF analysts state that huge and uncontrollable debt is the result of irresponsible policies of central banks, addicted to printing money and the distribution of loans. Governments, companies and individuals borrow for economic development. And when growth does not occur, they borrow even more, aided by the low interest rates of the largest central banks. Even before the Fed eased monetary policy, some central banks of developing countries reduced interest rates.
Take it while it’s available
According to IIF, it was the countries with emerging markets that made the largest contribution to the increase in global debt – their debt load exceeded 69 trillion dollars, or 216.4% of GDP. The highest relative growth was recorded in Chile, South Korea, Brazil, South Africa, and Pakistan. Moreover, a significant part is accounted for by the corporate sector, which almost reached the aggregate GDP of 30 developing countries in terms of their debts – 92.6%.
Having obtained unhindered access to capital markets, over two decades, developing countries have increased their corporate debt by 50 percent.
"The problem is that this group of borrowers does not have sufficient experience in managing debts over several economic cycles. As the recession begins, companies are overwhelmed by obligations that are difficult for them to pay off," explain the Institute of International Finance.
The greatest concern is China, where the economy has been developing for more than a decade via new loans. As a result, debt has increased fourfold – to almost 300% of GDP. The corporate sector, dominated by state-owned companies, borrowed $ 21 trillion – 155% of GDP. This is almost two-thirds of total debt. For comparison, corporate debt is 100% of GDP in Japan, and 74% in the United States.
To assess the scale of the problem, just look at the corporate bond market. In 2018 in China, these securities were at 1.72 trillion dollars – an indicator second only to the US (5.81 trillion). This year, 42% of the emerging corporate debt of emerging economies was provided by Chinese companies, which dramatically increases the risk of default in the near future.
Already, many companies are defaulting on bonds, declaring themselves bankrupt. Last year, 18,000 firms went bankrupt in the PRC, and the level of defaults on bonds was five times higher than in 2015. In 2019, another record is expected.
The fact that China’s high and volatile debt level is threatening with massive corporate defaults was previously indicated by the Organization for Economic Cooperation and Development (OECD).
"The slowdown in growth and increasing financing costs complicate debt servicing and are fraught with defaults. This will negatively affect banks' profitability and lead to liquidity problems," the OECD said.
Economists are sure that the current state of affairs clearly indicates that the debt bomb under the Chinese economy has already begun to smoke. Excessive debt load amidst an economic slowdown is a clear precursor to recession. A similar picture, for example, was observed on the eve of the global financial crisis of 2008. At some point, the global economy simply will not be able to digest huge and uncontrollable debt. And the coming crisis, as the financiers predict, will be much more severe and will result in massive impoverishment, powerful geopolitical instability, social unrest and wars.