Global debt levels are at an all-time high of over $255 trillion as of 2019, up significantly from $200 trillion in 2011. While global growth has slowed, the growth rate of debt continues to rise, mirroring debt levels prior to previous debt crises. High debt levels have historically been correlated with periods of low interest rates and extra debt burdens that leave economies vulnerable to rate increases or declines in output. Current debt levels as a percentage of global GDP are also at their highest since the last crisis in 2008. With debt continuing to outpace economic growth, concerns are rising around the sustainability of high debt levels and the potential for another global debt crisis.

1. The Rise of Global Debt
Like many equity markets global debt is at an all-time high. That- in itself is not a major
cause for concern if the economies of the world also grow at a commensurate pace. In fact,
if the overall GDP growth grew at a faster rate than the rate of debt growth overall
indebtedness could be considered a lessening burden overall. But this is not the case.
Some numbers would be helpful. Global debt is above USD 255 trillion at the end of 2019-
up from just under USD 200 trillion in 2011. Using the global growth rate for the
corresponding period we get a marginal rise in overall indebtedness to GDP ratio from 2011
(approximately USD 250 trillion). The critical thing is that- while global growth is slowing, the
growth rate of debt is rising so that we are at debt levels not seen since the last debt crisis.
Chart: Outstanding Global Debt

2. Source : The Institute of International Finance
We have had periodic debt crises in the last 4 decades: in the 80s when Mexico started a
chain of debt defaults that spread over most of Latin America and other Emerging Market
economies, in ’97 when many Asian countries (Indonesia, Thailand, Malaysia and South
Korea) faced a capital crisis and a global conflagration in ’08 which spread from the US
Subprime market across the world’s banking system. Are we overdue one now?
The similarities are there: all situations occurred in periods of low interest rates which
encouraged debt build-ups and an extra burden of debt to output that are susceptible to
any rate shock or output fall. There is no doubt that low interest rates create a moral hazard
in the form of complacency. The lessons of the PIGS economies (Portugal, Italy, Greece and
Spain) which loaded up on debt following their entry into the low interest fold of the
German dominated EU) are a prime example of this. The minute rates turn many weaker
economies (like companies) find themselves in hot water.
Global debt now stands at 322% of global GDP as of Q3 ’19, and overall indebtedness for the
US and Europe stands at 383% of their annual GDP with China at 310% according to
estimates by the Institute of International Finance. There has been rapid growth in debt in
‘18-’19 with the US and China behind nearly 60%. Sovereign related borrowing has
outstripped borrowing by the corporate sector and households and government bonds
account for 47% of the market- up from 40% at the time of the collapse of Lehman Brothers
according to Bank of America-Merrill Lynch. According to their estimates debt growth from
’08 (approximately USD 66 trillion) is: sovereign debt up USD 30 trillion, Corporates USD 25
trillion, Households USD 9 trillion and Banks USD 2 trillion.
What do we know about these data points? Firstly, this has helped fuel the global equity
rally with cheap money available to fund share buybacks, etc. Second, sovereign debt build-
ups have been facilitated by the growth in central bank balance sheet sizes (as noted in an
earlier column); this may be okay for governments since this is simply quantitative easing in
a different form but not for others- governments can use inflation as a tool to devalue their
overall debt exposure . Thirdly, the increased exposure of companies and households to

3. debt may bot act as an impediment to future growth or see the first casualties in the event
of a rise in interest rates.
An interesting side note here is that- as part of the US-China trade agreement, China has
agreed to open up its distressed debts to overseas (American) investors: Is this a clever way
of freeing up domestic liquidity by palming off difficult to recover debts through the Chinese
court system to unsuspecting American investors?
There is little to suggest an imminent uptick in rates. The spectre of inflation seems to be
buried with global prices remaining surprisingly benign even with historically low rates. The
US president is even calling on the Federal Reserve to lower them again. Europe and Japan
don’t have that pressure either. So, debt levels may continue to grow (with the US
surpassing a USD 1 trillion budget deficit last year for example) while GDP growth rates may
struggle as we get into the 20s. A reckoning is inevitable. The only question remains the
timing.