As the US and its allies seek to tackle the global financial crisis, a new analysis reveals a big risk to global economic growth: a huge increase in credit risk.
“Credit risk is rising exponentially, so that we are in the midst of the largest financial crisis since the Great Depression,” says a report by the Institute of International Finance (IIF), which conducted the research for the International Monetary Fund.
“This is a big issue for investors, because credit is a key lever for business investment and business investment is a huge driver of economic growth.”
In a report released this week, the IIF said that credit risk is projected to double by 2040, rising from around 2% of GDP today to almost 14% by 2050.
“The global credit crisis is a serious threat to economic growth, which will increase the burden of debt on households and businesses, and will lead to a deepening recession,” said the report.
It said that even if the global economic recovery were to continue, a debt-to-GDP ratio of more than 100% would be required to avoid a recession.
The IIF has warned that the current credit crunch could lead to the collapse of the US financial system and the world’s financial system, as well as to economic turmoil across Europe and Asia.
The study, which was conducted by researchers at the University of Illinois at Urbana-Champaign, analysed financial data from 10 countries, covering the period from 2008 to 2020.
“We looked at a wide range of indicators, from the size of the financial system to the share of the global economy in credit, the share in household and business debt, the credit-to and credit-against ratios, and the size and timing of credit market volatility,” said David D. Zwicker, the lead author of the report, which has been published in the peer-reviewed journal Global Financial Stability.
“Most of the indicators were positive, with the exception of the share that was declining, which is very worrisome.”
The study showed that the share going into debt to finance assets such as homes and cars fell sharply during the crisis, but the share actually going into assets such, as credit, fell more slowly.
But, “the overall picture was that the risk to the world economy from a credit crisis was much higher than what it would have been without the crisis,” said Dr Zwickers.
“It is now clear that a credit crunch is not a good idea.”
The IIFs report, titled The Rising Credit Risk, highlights the fact that the world is entering an era of high levels of debt, especially in developed economies.
The report said that the ratio of debt to GDP has already increased by nearly 50% since 2000.
“High levels of global debt have led to the creation of a debt burden that has outpaced that of developed countries,” the report said.
“Over the past 15 years, the growth of debt has accelerated from a ratio of about 11% in 2000 to more than 17% today.”
The report also said that in the period between 2008 and 2020, the US debt ratio was about 7% higher than that of its OECD peers, with China at more than 30%.
“The US has the highest ratio of credit-based debt in the world, but its relative size compared to OECD peers is not comparable to that of most countries,” said Zwiers.
“Its debt load is much larger than that for most countries, including its large economy.”
“Credit-based credit is the source of the most debt in many developing countries,” Dr Zwalks added.
“These countries rely on credit for most of their economic growth and the rising debt burden they are enduring from credit-driven investment.”
The World Bank has warned of the need to address the debt problem “in all regions of the world” and in the medium- and long-term.
“Debt is not only a problem in developing countries, but it is also a problem globally,” said Christine Lagarde, the managing director of the World Bank.
“What is happening is the global debt problem is becoming a global problem.”
She added: “As the global population ages, the debt burden on developing countries will grow.
“And it is a problem we can only tackle if we address the root causes of the debt crisis.” “
The world’s population has already doubled since 2000, rising to around 7.6 billion people, but there are more than 4 billion people in debt. “
And it is a problem we can only tackle if we address the root causes of the debt crisis.”
The world’s population has already doubled since 2000, rising to around 7.6 billion people, but there are more than 4 billion people in debt.
There are over 3,500 banks, credit unions, and other financial institutions in the US alone, accounting for about a quarter of all financial assets in the country.
“By 2040 the number of people in financial debt in this country will be at least five times greater than the number who were not in debt in 2000,” said Ms Lagarde.