Global Debt at Record $233 Trillion

Global debt soared to a record $233 trillion in the third quarter of 2017, according to a report from the Institute of International Finance.

That marked a $16.5 trillion—or 8%—increase from the end of 2016. It also reflected record highs for private nonfinancial sector debt in Canada, France, Hong Kong, Korea, Switzerland, and Turkey, news outlets reported.

One possible side effect of this massive debt burden could be  reluctance from central banks to tighten lending conditions, the IIF says. It points out in the report that because a prolonged low-interest-rate environment contributed to the swelling of debt levels, sovereign banks may be reluctant to rock the boat by hiking.

"High debt levels could limit the pace and scale of policy tightening, with central banks proceeding cautiously in an effort to support growth," a group of IIF analysts led by the executive managing director Hung Tran wrote in the report Thursday.

The IIF does note, however, that the global ratio of debt to gross domestic product declined for a fourth straight quarter. It now sits at 318%, roughly 3 percentage points lower than the record high reached in the third quarter of 2016.

"A combination of factors including synchronized above-potential global growth, rising inflation (China, Turkey), and efforts to prevent a destabilizing build-up of debt (China, Canada) have all contributed to the decline," the IIF analysts wrote, Business Insider reported.

China Sparking Concern

The IIF has warned of “heavy emerging market redemptions” noting that over $1.5 trillion of bonds and syndicated loans would be maturing through to the end of 2018.

China, Russia, South Korea and Brazil have a heavy dollar-debt repayment schedule this year with the Asian superpower’s debt becoming an increasing concern for other members of the global economic family.

China, which has accounted for the lion’s share of new debt in emerging markets, saw the pace of debt accumulation slow slightly; the deficit rose by two percentage points last year to 294% of GDP, compared to an average annual increase of 17 percentage points in the 2012-2016 period.

However, despite the growing debt mountain, the IIF said that robust economic growth meant debt-to-GDP ratios were actually declining.

The US-based financial industry body said while total debt had risen by $16 trillion (£11 trillion) in the third quarter compared to end-2016, debt ratio to global gross domestic product had fallen for the fourth quarter in a row as the world economy expanded.

The figure for total debt refers to what is incurred by the household, government, financial and non-financial corporate sectors.

The new data does little to ease fears that China risks sparking a fresh global financial crisis that were once again raised by the International Monetary Fund last December.

The IMF’s health check sent a warning around the world over the growing debt-dependency of the world’s second-biggest economy. China’s financial system is overheated with credit high by international levels, and personal debt has increased in the past five years. China though is under pressure to maintain the country’s rapid growth and the new middle-class is enjoying a period of prosperity.

The IMF said reforms by Beijing in recent years had not gone far enough. The assessment said: “The system’s increasing complexity has sown financial stability risks. “Credit growth has outpaced GDP growth, leading to a large credit overhang. The credit-to-GDP ratio is now about 25% above the long-term trend, very high by international standards and consistent with a high probability of financial distress.

“As a result, corporate debt has reached 165% of GDP, and household debt, while still low, has risen by 15 percentage points of GDP over the past five years and is increasingly linked to asset-price speculation. The buildup of credit in traditional sectors has gone hand-in-hand with a slowdown of productivity growth and pressures on asset quality.”

Moody’s said in a recent report that China’s shadow banking assets grew more than 20% in 2016 to 64 trillion yuan ($9.8 trillion), equivalent to 86.5% of China’s gross domestic product. Other analysts claim the shadow debt pot to be worth 122.8 trillion yuan or $18.5 trillion.