A dire warning this week regarding global debt consumption: the world is in so much debt that a second financial crisis is conceivable, according to the 16th annual Geneva Report. The findings, titled “Deleveraging? What Deleveraging?” was authored by three former central bankers and published by the Centre of Economic Policy and Research, and is considered an authority of world economics and projected growth and performance.
No Debt Lessons Learned
The titled sums up the tone of the report which states that, on a global scale, nothing has been done to deleverage crisis-linked borrowing. To be blunt – we have learned nothing in the six years since the first financial crisis, made evident by the continued onslaught of consumer and corporate borrowing, and government efforts to print money. Combined, these are two moves that are not conducive to economic strength and stability.
And, while some progress has been made in the U.S. and Canada with the wind-down of quantitative easing, Europe is only beginning to explore its stimulus options; the European Central Bank has announced a two-year bond and securities buying program with hope it will pump $1 billion Euros into the struggling Eurozone economy.
Canada Is One of the Most Indebted Nations
Canada is hardly setting a glowing example; we’re one of the most indebted nations, with a debt ratio of 284 per cent, meaning for every dollar made, the country as a whole owes $2.84. This is in comparison to the ratio of global total debt, which clocks in at 212 per cent – a 38 per cent increase since 2008.
There is evidence individuals are paying down debt in Canada, but corporations and governments continue to borrow more to survive. Per capita we are more in debt then the U.S. the UK and the Eurozone. The bright side of this story is our economic recovery is stronger than many other nations making our debt levels more manageable over time.
Debt Levels Affecting Emerging Nations
China has one of the most volatile credit situations, with the explosive growth experienced over the past 20 years threatened by global debt. Heavily indebted countries will eventually see their trade and importing abilities decrease – and that will have a deeply negative effect on import-dependent China. Globally speaking, the report says “debt-to-GDP is breaking new highs in ways that hinder recovery in mature economies and threaten new crisis in emerging nations – especially China.” It goes on to say that it is already clear that developed economies must expect prolonged low growth or another crisis along the way.
What are the Consequences?
At this rate, the world is headed toward a worse financial crisis than what was seen in 2008. The report shows that persistent borrowing and lack of focus to pay down debt by governments and corporations will have dire consequences. “The result is a substantial slowdown of nominal growth to below 2 per cent, which interacts perversely with the deleveraging process, being at the same time a hindrance to it and a consequence of it.
The reality is that the events of the past few years have redefined the term ‘unusual,’ according to the report. Central banks, including the U.S. Federal Reserve, will be expected to do more in the future than was expected under the settled notion of appropriate central banking before the crisis. The issue highlighted by the report is the extent of extreme action taking by the U.S. during the period of duress, and how it will be expected to step up again in a time of economic need. Canada will be in the same boat; already there is talk of implementing a so called “bail-in” program that will put emphasis on corporate bond holders to help large companies when faced with financial problems. This could be sign that Canada is well aware of what’s coming and wants to get out of the lending business in order to get the economy back on track.