Reducing debt levels accumulated through the financial crisis will be tough—but there remain reasons for optimismby Vicky Pryce / February 28, 2018 / Leave a comment
Debt is rocketing across the globe financed by record cheap credit.
Public debt owed by OECD countries has risen from $25 trillion in 2008 to some $45 trillion now, prompting the organisation to sound a warning last week.
In the eurozone total public sector debt rose from around 60 per cent of GDP before the financial crisis to near 95 per cent a couple of years ago, and though it has now come down to just under 90 per cent that still represents a substantial deterioration of many trillions of dollars in a decade. Spain, one of the fastest growing countries in the EU, has seen debt rise to 100 per cent of GDP. Portugal’s debt amounts to 130 per cent of GDP, Italy’s 137 per cent and Greece’s a whopping 188 per cent.
In China, not a full OECD member, overall debt private and public has reached some 257 per cent of GDP. With the country now embarking on what looks like serious fiscal relaxation, debt is forecast to exceed 300 per cent of GDP by 2020.
What has been going on?
Much of this reflects attempts to stymie the effects of the 2008 financial crisis on the real economy. The deleveraging of the financial sector meant that less money was generally available to lend to individuals and firms. The private sector reined back, saving more and borrowing less to improve balance sheets.
The state had to step in to compensate and avert a deep recession. Without extra public sector borrowing and bigger government deficits in the advanced nations the world would have sunk into depression.
This borrowing was done at very low cost, helped by cuts in interest rates to record lows and a massive injection of liquidity by the world’s central banks—we saw that in actions by the US Federal Reserve, the European Central Bank (ECB), the Bank of Japan and the Bank of England.
Sustained monetary expansion has transformed the rather anaemic recovery of the early years after the crisis into a fully-fledged synchronised expansion in the developed and developing world—with a corresponding increase in global trade. The world economy is forecast by the International Monetary Fund to grow by nearly 4 per cent in 2018, going back…