A wave of debt could swamp the world economy

From the Australian Broadcasting Corporation (ABC):

The World Bank has warned the largest and fastest rise in global debt in half a century could lead to another financial crisis as the world economy slows.

The 'Global Waves of Debt' report looked at the four major episodes of debt increases that have occurred in more than 100 countries since 1970 — the Latin American debt crisis of the 1980s, the Asian financial crisis of the late 1990s and the global financial crisis from 2007 to 2009.

The bank said during the fourth wave, from 2010 to 2018, the debt to GDP ratio of developing countries has risen by more than half to 168 per cent.

That was a faster increase on an annual basis than during the Latin American debt crisis.

Problematically, the rise in debt has been across both private companies and governments across the world, amplifying the risks if there is another global financial crisis.

China accounted for the bulk of the increase, with its debt-to-GDP ratio rising by nearly three-quarters to 255 per cent since 2010, now totalling more than $US20 trillion.

However, most emerging economies saw their debt rise over the eight years.

The report said the latest wave of debt was more challenging than the previous three waves because of the build up of both private and public debt, new types of creditors including foreign investors and the big rise in borrowing, which was global and not limited to one or two regions.

Poorer countries have also increasingly borrowed from non-traditional lenders such as China, which offer less favourable loan conditions, including higher interest rates and requiring stakes in projects as collateral.

The new report has upped the pressure on governments to prevent another debt crisis.

It found that of 519 cases of debt surges in 100 emerging and developing countries since 1970 roughly half ended in financial crises.

"75 per cent of them now have budget deficits, their foreign currency denominated corporate debt is significantly higher, and their current account deficits are four times as large as they were in 2007.

"Under these circumstances, a sudden rise in risk premiums could precipitate a financial crisis, as has happened many times in the past."