Fresh warnings over rising debt levels

Digital Finance Analytics principal Martin North said concerns raised about global debt in the latest report from the Bank for International Settlements (BIS) have been mentioned before, but noted that the warnings are “sharper this time around”.

“I rather feel as though BIS had to shout a bit louder because they didn’t feel like it was getting across.”

The BIS is an international financial organisation owned by 60 member central banks. In its 87th BIS Annual Report, released 25 June, the organisation pointed to “excessive indebtedness” as one of the “root” causes of financial crises, while warning of growing rates of debt worldwide.

While generally optimistic, the report highlighted four risks to the global economy’s general upswing; significant rises in inflation, high debt and maturation of financial cycles to the point of a bust, a fall in corporate investment and a “rise in protectionism” which could “challenge” the global economy.

Calling for global co-operation as a way to create “lasting economic prosperity,” Jaime Caruana, general manager at BIS, added that debt levels around the world “have continued to rise” and are currently at record levels.

He explained: “In 2016, the stock of non-financial sector debt in the G20 economies stood at around 220 per cent of GDP, almost 40 percentage points higher than in 2007. High debt might become a significant drag on demand as interest rates normalise.”

The International Monetary Fund (IMF) last year advised the Australian Prudential Regulatory Association (APRA) to rein in investor lending, while in May the Organisation for Economic Co-operation and Development (OECD) identified housing as the “largest risk” to Australia.

DFA’s Martin North highlighted “the rise and rise” of investor borrowing coupled with low interest rates and more expensive house prices as the root causes of Australia’s debt, however he added that rising debt was a global phenomenon, albeit Australia was “at the pointy end” of it.

He added that following the slowdown of Australia’s mining boom, the Reserve Bank of Australia (RBA) had used households “as a proxy for growth” while “implicitly” encouraging households to borrow more.

“We have a problem in Australia insofar that we have this big debt burden, a lack of growth, a lack of potential growth and that's the real thing that I think BIS is putting its finger on which is basically… yes, we have high household debt, but where is future growth coming from? That's the key question.”