Commentary: US Fed rate hike, stronger dollar aggravate global debt ris
By Gao Haihong-Mareeg.com-Global debt ended the first quarter at a record $247.2 trillion, up 11.1 percent from the same period last year, where non-financial corporate debt ($74 trillion) held the largest amount, according to latest data released by the Institute of International Finance (IIF).
The heavy debt was accumulated in a loose financing environment for years. The ultra long-term policies of low interest rates adopted by many countries have substantially expanded their credit and lowered corporate borrowing costs.
Fiscal stimulus also encouraged governments and corporations to increase debt, making cheap loans enter the market and raising levers. The financial cycle signified by credit expansion and the rise in asset prices entered an upward period ahead of the business cycle, and asset bubbles were soon formed.
There will be a great deal of risks brought by the accumulated global debt.
High debt has restrained the adjustment room of fiscal policies. Experience suggests that economies bearing higher public debt and severe financial deficit will face a comparatively longer recession period. That’s because a downward economy needs the support from fiscal policies but the heavy public debt would restrain the effectiveness of policies.
Heavy debt burden may lead to a financial crisis. Regarded as a main indicator of financial fragility, debt burden is closely related to the health of a country’s banking system and has an impact on asset prices, investment and consumption.
For countries with greater openness of capital accounts, domestic financial fragility will soon send a warning to the financial market, causing capital outflow and currency devaluation. The capital outflow and currency depreciation in Argentina, Brazil, Turkey and other countries in recent years were all related to the above reason.
The interest rates hike announced by the US Federal Reserve and a stronger US dollar worsen the debt challenges. The rising interest rates would place a heavier burden on interest repayments, and enormously impact floating rate notes.
It’s estimated that floating rate bonds account for more than 10 percent of corporate debenture in emerging markets. The appreciation of the US dollar has heightened the risk for emerging markets to repay the bonds in the dollar, as the dollar accounts for a dominant 80 percent of their foreign-currency funding.