While the economic recovery has been slower than many would have liked, it has been fairly broad based and persistent. Investors can thank the expansive fiscal and monetary polices of central banks around the globe for much of the rebound. But unfortunately, the last decade of ever lower interest rates also has fueled a buildup in debt levels. According to the Institute for International Finance (IIF), as of the third quarter of last year, global debt totaled $244 trillion or a near record 318% of GDP. Most of this increase (75%) has come from government and non-financial corporate debt issuers (see chart below). Emerging markets have seen the largest increase in corporate debt while in more mature markets, government issuers fueled the gains. The IIF statistics also reveal a persistent global shift away from traditional bank financing. This has been particularly true in emerging markets where nearly 25% of total credit to the private sector now originates outside traditional channels.
The rise of non-bank lenders is presenting a particular challenge in China today. Over the last decade, local governments and their more than 2,000 financing companies have funded economic development projects by issuing large amounts of privately offered funds. Independent brokers and advisors, in turn, have offered these investment vehicles to individual investors. But assessing credit quality in this sector of the Chinese bond market is particularly difficult given insufficient oversight and the courts’ limited ability to enforce judgments on governments or state-backed companies. Official data estimates total local and central government debt at just under $4.5 trillion or 36% of GDP. Zhang Ming from the Chinese Academy of Social Sciences further estimates that when all forms of off-balance sheet debt are added in, the total is closer to 67% of GDP.
Provinces in far-off lands are not the only home to debt problems. Consider the case of student debt here in the U.S. The dollar amount of student loans outstanding is not overlarge when compared to other forms of consumer debt. At $1.44 trillion, it is similar to the amount of auto debt outstanding ($1.3 trillion) and well below total mortgage debt ($9.1 trillion). But the increasing delinquency rate of these loans is of real concern. As of the third quarter of 2018, 9.1% of student debt was more than 90 days overdue. Delinquency rates doubled over the 2003-2011 period and a recent study by the Brookings Institute, estimates that almost 40% of borrowers are expected to fall behind by 2023. Loan delinquency in this population of 44 million borrowers is particularly damaging to the economy; student loan borrowers are generally entering their household formation years, a period of above average consumer spending. Student debt also has the potential to negatively impact multiple generations given that many privately issued loans are not discharged at death.
Low interest rates were likely just what was needed to get us out of the 2008-2009 financial crisis. But having elevated debt levels concentrated in specific sectors of the global economy may become a big problem if either economic growth slows or interest rates increase. Central banks around the globe are doing their best to balance the risks associated with these two outcomes.