Tags: McKinsey | global | debt | crisis

McKinsey Study: Global Debt Burden Raises 'Fresh Concern'

By    |   Thursday, 05 February 2015 12:13 PM

Global debt levels continue to rise, and that could mean trouble for economies and financial markets, according to a new report from McKinsey.

From 2007 through the second quarter of 2014, global debt grew by $57 trillion, raising the global debt-to-GDP ratio by 17 percentage points to 286 percent, the study says.

"This is not as much as the 23-point increase in the seven years before the crisis, but it is enough to raise fresh concerns," the report states.

Governments in advanced economies have borrowed heavily to fund bailouts and boost demand. Private sector debt also has climbed rapidly in many countries.

"Absent additional steps and new approaches, business leaders should expect that debt will be a drag on GDP growth and continue to create volatility and fragility in financial markets," the study notes.

"Policy makers will need to consider a full range of responses to reduce debt as well as innovations to make debt less risky and make the impact of future crises less catastrophic."

The increasing global debt "slows the recovery, raises the risk of new crises and it limits the ability to respond to them. While significant deleveraging may prove elusive for many countries, effectively managing the growth of debt — and reducing it where necessary — is an imperative."

Tied to the debt buildup has been central bank easing around the globe. But that easing hasn't been sufficient to boost economies in many countries. And why is that?

"Simply put, we live in a world in which there is too much supply and too little demand," star economist Nouriel Roubini of New York University writes in an article for Project Syndicate. "The result is persistent disinflationary, if not deflationary, pressure, despite aggressive monetary easing."

Eurozone consumer prices fell 0.6 percent in the year through January. And the U.S. personal consumption expenditures price index, the Federal Reserve's favored inflation measure, climbed only 0.7 percent last year.

"The inability of unconventional monetary policies to prevent outright deflation partly reflects the fact that such policies seek to weaken the currency, thereby improving net exports and increasing inflation," Roubini says.

"This, however, is a zero-sum game that merely exports deflation and recession to other economies."

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Global debt levels continue to rise, and that could mean trouble for economies and financial markets, according to a new report from McKinsey.
McKinsey, global, debt, crisis
Thursday, 05 February 2015 12:13 PM
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