Global Debt

Global debt keeps increasing from 2007 to 2016. It exposes countries to challenges related to government debt, household debt, financial-sector debt, and china’s debt. There are some ways to address this problem with the big goal to deleverage the economy.

The global financial crisis and recession led global debt to grow by $57 trillion. According to an article of Business Insider Australia written by David Scutt, the 2016 global debt reached $215 trillion. The emerging market contributed to a large portion of its increase where in 2006 the global debt of emerging market was only $16 trillion and jumped to $56 trillion in 2016. Below is the graph showing the growth of global debt both in emerging markets as well as mature markets.

The McKinsey & Company report shows that some areas including government debt, household debt, financial-sector debt, and china’s debt contributed the growth of global debt. These areas remain a challenge. Since 2007, the government debt reaches $25 trillion urging the decline of the demand in the private sector. Unfortunately, this growing will continue to the five years afterwards in most developed countries such as Japan, European, and US. Encountering this growth, the fiscal balances need to deleverage into 2% of GDP in these countries. Hence, it remains challenging since the private sectors seems not improving to make these countries gaining benefit from high demand of the export. Despite all that, the experts underline increasing the inflation rate and the taxes imposed to the wealth as well as distribute the sales of public asset into wider areas might reduce government debt.

Furthermore, the household debt serves as the main factor causing global debt. The declining of housing price while financial crisis happen will lead to a recession. Deleveraging the household depends on the mortgage and limits by regulation as well as urbanization. Thus, managing the population to be widespread within a country is needed. This happens since highly concentrated population has a potential to a higher household debt. Moving into financial sector debt which increased by $17 trillion in 2007 from $20 trillion in 2000 leading to the existence of shadow banking system. This increasing debt can be reduced by the increasing non-bank credit. The online lending system contributed to this growth. Although the online system might be risky in terms of the security, the regular and advance monitoring system can tackle this potential problem.

In addition, Chinas as the second largest economy in the world contributes largely on the global trade as well as the global GDP. China’s debt in 2014 reached $28.2 trillion, four times bigger than its debt in 2007. Its debt reaches 250% of GDP. This could be resulted on fatality. Unfortunately, China seems to be addicted towards corporate debt which may weaken their financial system.

“We find three particular areas of potential concern in China: the concentration of debt in real estate, the rapid growth and complexity of shadow banking, and the off-balance sheet borrowing by local governments.” (McKinsey Global Institute 2015, 11).

All of these challenges can be addressed through several ways.

1. The flexibility of mortgage contracts is needed. Although it seems to be risky and costly, however, it may eliminate the cost against social and economical aspects thus making better the stability of the financial system.
2. The private-sector debt has to have a good process. This involves non-resource loans to eliminate the potential of bad debt.
3. The macro-prudential regulations are needed to reduce borrower’s intention to increase their debts. This will also provide an ease to leverage the economy.
4. The tax imposed in debt has to be reduced in order to trigger company allocates their budget in capital goods.
5. Paying attention on the total government debt can be done by utilizing several tools to encounter sovereign debt. This will lead to sustainable economy.
6. The lenders and regulation making have to collect more data to analyze the global debt and its potential risk towards the global economy. They also need to monitor every single change in this debt.
7. Although the bank credit keeps increasing, however, this can be tackled by improving the non-bank credit.
8. Developing economies contribute largely to a global debt in current year. In increased by $40 trillion in 2016. Thus, the focus to monitor and manage the debts in these developing economies should become the priority.

The global debt is triggered by the government debt, household debt, financial-sector debt, and china’s debt. The 2016’s global debt reached $215 trillion and indicated by emerging markets debt that increased significantly in this year. There are several ways to tackle this. One of them is focusing on the development of developing economies since their debt has increased significantly in past year. Another focus has also be addressed to China’s debt since it serves as the second largest economy in the world, thus, contributing a large portion of the global GDP.

Sources:

McKinsey Global Institute. (2015). Debt and (not much) deleveraging. Retrieved from http://www.mckinsey.com/global-themes/employment-and-growth/debt-and-not-much-deleveraging

Scutt, D. (2017). Global debt has hit an eye-watering $215 trillion. Retrieved from http://www.businessinsider.com/global-debt-staggering-trillions-2017-4?IR=T&r=US&IR=T

France-Presse, A. (2016). China’s debt is 250% of GDP and ‘could be fatal’, says government expert. Retrieved from https://www.theguardian.com/business/2016/jun/16/chinas-debt-is-250-of-gdp-and-could-be-fatal-says-government-expert