Today, the IMF announced concerns related to the global debt level reaching all-time highs.  Total global debt outside of the financial sector has reached $152 trillion, and two-thirds of this debt consists of liabilities in the private sector.  The IMF has stated that the high level of debt in this sector “can carry great risks when…(it reaches) excessive levels”, and that this could thwart the fragile economic recovery.  The IMF says that there is empirical evidence that confirms “that financial crises tend to be associated with excessive private debt levels in both advanced and emerging market economies”.

In its latest Fiscal Monitor, the IMF notes that the size of debt across the globe could result in an unprecedented private deleveraging process.  Deleveraging could further distress the financial system because of banks’ balance sheets not being strong enough to able to provide an efficient flow of credit.  However, the Fund also says that “historical precedents and alternative indicators of debt overhand indicate that the private deleveraging process may still take some time to play out, even more so in light of low nominal growth”.

In advanced economies, public debt has increased by close to 50% since the start of the global financial crisis.  Much of the risk from high global debt is attributable to the private sector, but too much public debt can exacerbate “the depth and duration of the ensuing recession”.  Debt levels now represent a record 225% of world GDP.  Even if high debt levels don’t trigger a crisis, they have been shown to be correlated with lower growth rates.