Why the next global crisis may stem from China
A
"poisonous combination" of low economic growth and high debt could
catapult the world into its next crisis, led by China, warned senior
economists.
CNBC
Mon, Sep 29, 2014, 8:48pm EDT - US Markets are closed
Why the next global crisis may stem from China
By Katy Barnato
13 hours ago
Martin Moos | Getty Images
"Contrary to widely held beliefs, the world has not yet begun to
delever and the global debt-to-GDP is still growing, breaking new highs.
At the same time, in a poisonous combination, world growth and
inflation are also lower than previously expected," Reinhart and
colleagues wrote in the 16th annual Geneva Report.
The authors said the ratio of global debt to GDP was "increasing at an
unabated pace and breaking new highs". They calculated that world debt
levels stood at 212 percent of the global economy, excluding the
financial sector, in 2013-up 38 percent points since 2008.
The
Geneva Report noted that debt accumulation was led by developed
economies until 2008, but has latterly been propelled by developing
economies.
"The ongoing vicious circle of leverage and policy attempts to
deleverage, on the one hand, and slower nominal growth on the other, set
the basis for either a slow, painful process of deleveraging or for
another crisis, possibly this time originating in emerging economies
(with China posing the highest risk)," the economists said.
"In our view, this makes the world still vulnerable to a further round
in the sequence of financial crises that have occurred over the past two
decades."
China's
debt-to-GDP ratio stood at 217 percent, according to the Geneva Report.
This ratio was higher than most of its emerging market peers, but below
developed economies like the U.K. and U.S. and Japan.
Debt levels are also rising in the "fragile eight" countries of India
and Indonesia in Asia, Brazil, Argentina and Chile in South America,
plus Turkey and South Africa. These are all major emerging markets that
suffered credit bubbles and escalating current account deficits
following quantitative easing by the Fed.
Read More ECB QE good for emerging markets: Turkish Fin Min
All of Argentina, South Africa, India, Brazil and Turkey had debts
worth more than the size of the economies (excluding the financial
sector) last year, according to the Geneva Report.
"This group of countries are a main source of concern in terms of
future debt trajectories, especially China and the so-called fragile
eight, which could host the next leg of the global leverage crisis,"
they wrote.
The Geneva
Report's warning comes ahead of the International Monetary Fund's update
on the world economy on Tuesday, and its annual get-together from
October 10-12.
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