the

Is a global debt crisis coming? | CNBC Explains

total worldwide debt has never been

higher and yet there's little sign of

this current wave retreating anytime

soon now with the corona virus outbreak

being declared a pandemic governments

have announced hundreds of billions of

dollars in stimulus packages that will

send debt even higher so just how

worried should we be if it all comes

crashing down

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global borrowing has been growing

rapidly so rapidly that many are

concerned it is quickly becoming

unsustainable the Institute of

International Finance estimates total

worldwide debt which is made up of

borrowings from households companies and

government surged to a staggering 253

trillion dollars at the end of September

2019

that's a whole lot of debt more than

three times the annual economic output

of the entire world it works out to

roughly thirty two thousand five hundred

dollars of debts for each of the seven

point seven billion people on the planet

what's more the group says this figure

is only going to increase the World Bank

believes the speed and scale of this

debt wave is something we should all be

worried about so much so the group has

urged governments around the world to

make it a primary concern but let's take

it a step back put simply debt is

created when one party borrows from

another it allows individuals to buy

something they wouldn't normally be able

to afford that has its benefits for

example you might take on debt when you

get a loan to buy a car or mortgage on a

house this allows you to pay back the

cost of those investments over time

instead of all at once the cost of this

service is the interest rate at present

interest rates around the world have

fallen to historically low levels this

has made it cheap to borrow from banks

meaning businesses can make large

investments and homeowners don't need to

spend as much on their monthly mortgage

payments there are drawbacks to a low

rate environment though individuals are

likely to see much of a return on their

savings and both people and businesses

could load up on too much cheap debt

something we're seeing now governments

take on debt to which they can use to

stimulate the economy by funding

infrastructure projects social programs

and more how much a country's government

owes is known as sovereign debt

sovereign debt is very different to how

we might think about debt as an

individual but one thing they both have

in common

is that problems tend to arise when that

borrowing becomes excessive loans to

countries with developed economies like

Canada Denmark

or Singapore are generally seen as safe

investments that's because even if

government's been beyond their means

lawmakers can raise taxes or print more

money to ensure they pay back what they

owe

but loans to governments in emerging

markets are generally seen as much

riskier which is why these countries

will sometimes issue debt in a foreign

more stable currency although this

allows them to attract more investors

from abroad looking for bigger returns

an economic slump weak home currency or

high debt burden can make it difficult

for the government to pay them back

ultimately the most important risk when

it comes to national borrowing is that a

country may fall behind on its debt

obligations and default this isn't

common but it has happened

take Lebanon in 2020 Argentina in 2001

and Russia in 1998 over the last 50

years there have been four waves of debt

accumulation we're currently in the

midst of the fourth wave so what can we

learn from the first three well for one

none of them have had a happy ending

let's start with the first wave in the

1970s many Latin American countries

began to borrow extensive amounts of

money from US commercial banks and other

creditors to support their development

it didn't seem like a problem at the

time interest rates were low and Latin

American economies were flourishing but

in the background the debt wave was

rising at the end of 1970 the region's

total outstanding debts from all sources

added up to 29 billion dollars by the

end of 1978 that number had shot up to

159 billion dollars four years later it

more than doubled to 327 billion dollars

in the 80s major economies began hiking

up their interest rates as they battled

inflation oil prices were sliding and

the world economy was entering a

recession in 1982 the starting gun of

the Latin American debt crisis was

effectively fired when Mexico announced

it would not be able to service its

debts this move quickly sparked and

meltdown across a region with the

fallout spreading to dozens of emerging

economies worldwide many countries in

Latin America

were forced to devalue their currencies

to keep exporting industries competitive

in the face of a sharp economic downturn

between 1981 and 1983 Argentina weakened

its currency against the US dollar by 40

percent Mexico by 33 percent and Brazil

by 20 percent ultimately 27 countries

had to restructure their debts 16 of

them were in Latin America the second

wave ran from 1990 through the early

2000s it was unlike the first in the

debt accumulation in the private sector

played a much more prominent role in the

late 80s and early 90s many advanced

economies deregulated their financial

markets the policy changes led to many

banks consolidating and these bigger

banks operations became increasingly

global this helped prompt a massive

surge of capital into emerging markets

with falling interest rates and a

slowdown in advanced economies also

fueling the surge developing economies

began to rack up a lot of debt most

notably Indonesia South Korea Malaysia

the Philippines and Thailand yes this

growing wave of debts went largely

unnoticed

you see debt was growing rapidly but so

was GDP meaning the ratio between the

two stayed consistent and most of the

debt was hidden in the private sector a

currency crisis in Mexico in 1994

thrusts international investors back

into panic mode with the country's

default a decade earlier still fresh in

people's minds yet while a 50 billion

dollar bailouts from the US and the IMF

meant Mexico was narrowly able to avoid

a default this time around it wasn't

enough to stop panic spreading to other

countries it led to an abrupt stop and

reversal of capital flows in 1997 by

this point Indonesia South Korea

Malaysia the Philippines and Thailand

had developed the dependence on

borrowing coupled with several policy

failings this helped usher in a crisis

in East Asia's financial sector and

ultimately another global downturn while

those impacted by the Asian financial

crisis recovered international borrowing

carried on

at a brisk pace enter the third global

debt wave which lasted from 2002 to 2009

at the end of the previous century the

United States removed barriers between

commercial and investment banks or the

European Union encouraged cross-border

connections between lenders this paved

the way for the formation of so-called

mega banks these banks led the way in a

sharp increase in private sector

borrowing particularly in Europe and

Central Asia defaults in the US subprime

mortgage system powered more and more

pressure on the country's financial

system pushing it to the brink of

collapse in the second half of 2007 and

2008 the shockwaves reverberated across

the world with one economy after another

falling into deep would be a short-lived

recession in the US the 2009 recession

was so severe that output from the

world's largest economy sank to its

lowest level since the Great Depression

the World Bank says we're currently in

the midst of the fourth wave of global

debt and if we're to avoid history

repeating itself yet again governments

must make debt management and

transparency a top priority this wave of

global debt is thought to share many of

the same characteristics as a previous

three including prolonged periods of low

interest rates and changing financial

landscapes which encourage more

borrowing but the World Bank has called

the current wave the largest fastest and

most broad-based of them all it involves

a concurrent buildup of both public and

private debt involves new types of

creditors and is much more global

however as the corona virus pandemic

threatens to sink the world economy the

moment for stemming the tide may have

passed thanks for watching if there are

any other topics you think we should be

covering please do let us know see you

next time