Global leverage still growing, led by emerging economies

The 16th Geneva Report on the World Economy by Luigi Buttiglione, Philip Lane, Lucrezia Reichlin and Vincent Reinhart says that the world economy has not deleveraged.

Contrary to widely held beliefs, the world has not yet begun to delever. Global debt-to-GDP is still growing, breaking new highs...

[G]lobal debt accumulation was:
• Led by developed economies until 2008; but
• Has been led by emerging economies since 2008; the sharp rise in Chinese debt is especially striking.

These emerging markets as a group are an important source of concern in terms of future debt trajectories. China and the so-called ‘fragile eight’ could find themselves in the unwanted role of ‘host’ to the next phase of the global leverage crisis.

The authors further note that the world is seeing low growth and inflation rates. Therefore, they recommend caution on interest rate rises, adding that the European Central Bank in particular “should catch up with the other major central banks in an aggressive policy of quantitative easing”.

Beyond monetary policy, the authors also address the fiscal challenges, the scope for macro-prudential policies, the restructuring of private-sector debt and sovereign debt, and enhanced international policy co-operation in addressing excessive global leverage.