Global debt-to-GDP is now at a record high and the Bank for International Settlements has noted that over the last 16 years, debts of governments, households and corporations has gone up everywhere.
In the US, debt is up 63%. The Eurozone, the UK, Japan, Canada and Australia average around 52%. In emerging markets, led by China, leverage is up 85%. In some emerging economies (Brazil), major cities are on the verge of bankruptcy.
In countries like France and Italy, credit downgrades are expected – and Greece is in trouble again. There is a rift between the European Union and the IMF over Greek debt sustainability. Most of the debt is with the European Commission, so German policy makers are essentially the lenders, and they are unwilling to take a haircut on bond prices. The IMF predicts that the Greek debt-to-GDP ratio, now at 180%, will soar to 275%, while primary fiscal surplus is currently at zero. That means Greece is broke.
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Jaime Caruana, General Manager for the BOS hinted in a recent speech in Brussels that the core central banks might not know what they’re in for saying:
“We need to escape the popular models that prevent us from recognizing the build-up of vulnerabilities. Getting all the right dots in front of you does not really help if you do not connect the dots.
Right now, I worry that even though we have data on aggregate debt, we are not properly connecting the dots and we are underestimating the risks, particularly when the high levels of debt are aggravated by weak productivity growth in many countries.
The standard of evidence for precautionary action has to be the preponderance of evidence, not evidence beyond a shadow of doubt. Waiting for fully compelling evidence is to act too late.”