The spectre of unsustainable debt has returned to haunt governments across the world. Even when self-imposed or externally enforced austerity has forced governments to retract from the debt-financed stimuli they adopted in the aftermath of the global financial crisis, the problem of excess debt has not gone away.

The reliance on unconventional monetary policies involved the infusion of large volumes of cheap money into the system, to engineer recovery. This has led to the return of private debt to levels reminiscent of the years before the global financial crisis. Initially, as governments borrowed to recapitalise banks and rescue financial firms, as well as to finance a stimulus in the form of increased spending or large tax cuts, the expectation was that the resolution of the private debt crisis would result in a mountain of public debt.

Credit to governments in BIS reporting countries rose from an average of 65 per cent of their GDP in March 2008 to 89 per cent in December 2016, after which efforts at reining in deficits brought the figure down to 82 per cent at the end of 2018 (Chart 1).




But this resort to debt financed spending by governments in response to the crisis has not ensured a robust recovery, or helped to resolve the private debt problem. On the contrary, credit to the private non-financial sector ,which had come down from 151 per cent of the GDP of the reporting countries in March 2008 to 139 per cent in December 2011, has since risen and stood at 151 per cent of GDP at the end of 2018, which is well above the pre-crisis figure.

This return of high levels of debt is because credit to the household sector (including non-profit institutions serving households), which while marked by fluctuations, came down from 67 per cent of GDP in March 2008, to 60 per cent in December 2018. But more importantly, corporate debt (or credit to non-financial corporations) which fell for a brief period from its level of 84 per cent of GDP in March 2008, rose to touch 97 per cent of GDP in March 2018 and stood at 92 per cent in December 2018.

Corporate borrowings

The developed world is where the debt problem due to corporate borrowing is particularly acute. In the advanced economies, credit to the non-financial sector, which rose from 206 per cent of GDP in the first quarter of 2003 to 251 per cent at the time of the financial crisis in early 2008, continued its rise after the crisis (Chart 2).



Initially, the rise was largely the result of increased government borrowing, which rose from 71 per cent of GDP in the first quarter of 2008 to a high of 114 per cent of GDP in June 2016. On the other hand, credit to the private non-financial sector in the advanced economies, fell from 176 per cent when the crisis hit in March 2008, to around 163 per cent of GDP in 2018.

However, the fall has been largely on account of deleveraging in the household sector, which accounted for 80 per cent of the decline. Credit to corporations, which peaked at 93 per cent in the first quarter of 2008, stood at the same level in the first quarter of 2018.

In the emerging markets, the situation may be even more worrying because of the large increase in exposure to debt of the private sector. The ratio of credit to the non-financial sector to GDP rose from 111 per cent in December 2001 to120 per cent in March 2008 (Chart 3).




But fuelled by the borrowing facilitated by the expansionary monetary policy adopted by developed country central banks in response to the crisis, that ratio rose sharply to a high of 194 per cent in the first quarter of 2018 and stood at 183 in the last quarter of that year.

On the other hand, government debt rose much less from 36 per cent in 2008 to 48 per cent a decade later. Thus, the explosion of emerging market debt was largely because of borrowing by the private, non-financial sector, with corporate debt rising from 60 per cent of GDP in the first quarter of 2008 to 104 per cent in the first quarter of 2018.

This exposes a number of troublesome trends. First, lending to the non-financial corporate sector in the North has remained high. The ratio of such lending to GDP of the advanced countries had risen from 77 per cent in the first quarter of 2001 to 93 per cent in the first quarter of 2008 in the run up to the crisis. Though there was recognition after the crisis that this exposure had to be significantly reduced, that ratio averaged 91 per cent over 2017-18. Any hike in interest rates would increase the burden that would be borne by corporations on account of their huge pile of debt, increasing the risk of default.

Debt rise

Second, in emerging markets, both public and private debt has increased: the former from 36 per cent of GDP in March 2008 to 48 per cent in 2018, and private debt from 83 per cent to 138 per cent. Here too, corporate exposure has increased significantly, often on account of foreign exchange borrowing. That adds exchange rate risks to the risks of a possible rise in interest rates.

Third, the external debt of poorer developing countries has also increased. The external debt stock of low-income developing countries which had fallen from $87.8 billion in 2000 to $83 billion in 2008, partly because of a round of debt write offs under the HIPIC initiative, has more than doubled since, to $173 billion.

In sum, the specific way in which the global financial crisis was sought to be addressed keeping in mind the interests of finance, has delivered a debt spiral, without imparting much dynamism to the world economy. There is a real possibility of another debt meltdown.