Asian Debt Defaults to Rise as Currencies Weaken, Liquidity Tightens
China, India cited as main spots to watch for more nonpayments
Shadow banking crackdown, rising rates hurting weak borrowers
A growing chorus of observers expect debt defaults in Asia will spread as weakening currencies and tighter liquidity leave riskier borrowers with higher refinancing costs.
Rising failures add to headwinds that governments have to navigate during a politically fraught 2019, with elections in India and Indonesia. Asian dollar bond market defaults tripled to at least nine in 2018 from the previous year, according to Bloomberg-compiled data.
Markets, to paraphrase Nobel prize-winning economist Thomas Schelling, often forget that they keep forgetting. That’s especially true when it comes to the intractable challenges posed by global debt.
Since 2008, governments around the world have looked for relatively painless ways to lower high debt levels, a central cause of the last crisis. Cutting interest rates to zero or below made borrowing easier to service. Quantitative easing and central bank support made it easier to buy debt. Engineered increases in asset prices raised collateral values, reducing pressure on distressed borrowers and banks.
All these policies, however, avoided the need to deleverage. In fact, they actually increased borrowing, especially demand for risky debt, as income-starved investors looked farther and farther afield for returns. Since 2007, global debt has increased from $US167 trillion ($237 trillion) ($US113 trillion excluding financial institutions) to $US247 trillion ($US187 trillion excluding financial institutions). Total debt levels are 320 per cent of global GDP, an increase of around 40 per cent over the last decade.
All forms of borrowing have increased – household, corporate and government. Public debt had to grow dramatically to finance rescue efforts after the Great Recession. US government debt is approaching $US22 trillion, up from around $US9 trillion a decade ago – an increase of 40 per cent of GDP. Emerging market debt has grown as well. China’s non-financial debt has increased from $US2 trillion in 2000 (120 per cent of GDP) to $US7 trillion in 2007 (160 per cent of GDP) to around $US40 trillion today (250 per cent of GDP).
US non-financial corporate borrowing as a share of GDP has surpassed 2007 levels and is nearing a post-World War Two high. Meanwhile, the quality of that debt has declined. BBB-rated bonds (the lowest investment-grade category) now account for half of all investment-grade debt in the US and Europe, up from 35 per cent and 19 per cent, respectively, a decade ago. Outstanding of CCC-rated debt (one step above default) is currently 65 per cent above 2007 levels. Leveraged debt outstanding (which includes high-yield bonds and leveraged loans) stands at around $US3 trillion, double the 2007 level.
National debt is just the tip of the iceberg.
Unfunded liabilities such as Medicare, Social security, and pensions dwarf this amount by a factor of 10. pic.twitter.com/KmTXSEOaNa
— THE LONG VIEW ⚫️ (@HayekAndKeynes) May 21, 2018