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Debt bear stalks Goldilocks economy
PARIS, Dec 18, 2017 (BSS/AFP) – The global economy is enjoying a
Goldilocks moment, with growth and inflation neither too hot nor too cold.
But a decade after the collapse of the US subprime mortgage market
triggered a global crisis, there are warnings that debt is becoming a big
risk, lurking in the next room like the scary bears in the children’s tale.
The outlook for the global economy appears bright for the moment thanks to
steady growth in the world’s major economies, in stark contrast to reigning
pessimism only a year ago when Britain’s Brexit vote and Donald Trump’s
protectionist policies weighed on sentiment.
The US economy is purring along in the longest cycle of expansion in its
history and China, the locomotive of global growth in recent decades, is on
track to deliver more.
Meanwhile the eurozone is finally expanding at a reasonable pace after
years of anaemic performance and emerging nations like Brazil are expected to
rebound from recession.
“The crisis which struck our continent … is behind us and this growth
gives us reason to believe it is sustainable,” the EU’s economic affairs
commissioner Pierre Moscovici said recently.
The International Monetary Fund (IMF) and the Organisation for Economic
Cooperation and Development (OECD) expect the global economy to grow by 3.7
percent in 2018 and their forecasts are infused with an optimism unseen in
over a decade.
But that doesn’t mean that governments should be complacent, they caution.
IMF chief Christine Lagarde has taken to quoting US president John F.
Kennedy to impress upon governments that they need to address potential
problems now.
“Pleasant as it may be to bask in the warmth of recovery … the time to
repair the roof is when the sun is shining,” Kennedy advised lawmakers as the
US economy recovered from recession, she reminded listeners in an October
speech.
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Risks this time could stem from private firms succumbing to unsustainable
debt.
The IMF, OECD and economists have pointed to the rising gearing of
companies which, having bulked up on borrowing amid ultra-low interest rate
policies meant to fuel economic recovery, now face the prospect of rising
interest rates.
– Zombie firms –
“Indebtedness of households and corporations has reached record levels in
many countries,” OECD chief Angel Gurria said recently.
So-called “zombie firms” are in the frontline of risk.
Ultra-low interest rates have allowed companies with little or no profits
to continue operating by lowering their costs, making them the “walking dead”
of the corporate world.
But as interest rates tighten, a move already underway in the United
States and likely to happen in the eurozone within a couple of years, the
cost of servicing loans could quickly exceed profits, forcing them to
restructure or close.
A wave of failures and defaults on bonds could then quickly pull the rug
out from under the global economy.
“It’s a serious subject,” said one debt specialist on condition of
anonymity.
“The indebtedness of companies in certain emerging countries has become
massive and some of them are over-indebted and will have problems making
repayments when interest rates rise,” said the specialist.
“When one of those companies is systemic, the country will be forced to
bail it out to rescue it, transforming private debt into public debt,” in
what would be a grim echo of the global financial crisis when the US rescued
insurer AIG, and Ireland and Spain saved their banks.
This time, China is in the spotlight.
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The IMF warned earlier this month that dozens of crucial lenders in China
needed to beef up their defences against any fallout from failing zombie
firms.
China has largely relied on debt-fuelled investment and exports to drive
its tremendous economic growth, and in some cases local banks have faced
pressure to lend to politically important companies as local governments aim
to maintain high employment even if that means cash-bleeding enterprises
continue to operate.
Gurria voiced confidence that Chinese authorities will be able to handle
the problem.
“Yes, it’s a concern,” he acknowledged. “Yes it has been identified and
given the capacities of the Chinese regulators and the authorities to act
fast on these issues, we believe it will not be out of control,” he said.
– Bitcoin bubble –
Some economists are also beginning to wonder whether virtual currencies
could contribute to a future crisis.
The value of bitcoin has soared this year from under $1,000 in January to
over $18,500 in December as the cryptocurrency made a major step towards
inclusion in regular financial markets when bitcoin futures began to trade on
the Chicago board options exchange.
Experts have warned bitcoin’s spectacular rise shows all the signs of
being a speculative bubble. And many traders are buying bitcoin on margin,
meaning that they are borrowing and could face ruinous losses if the bubble
bursts.
“What is dangerous is this combination of a bubble with borrowing,” said
economist AgnSs Benassy-Quere.
“I don’t believe the bitcoin phenomenon has the magnitude to destabilise
the markets, but the same was said with subprimes,” she said.
The freezing up of the subprime mortgage market in the United States
triggered the global economic crisis a decade ago.
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