Global debt at record high, IMF warns

Washington: Worldwide public and private debt is at an all-time high, posing a substantial impediment to getting global economic growth back to normal, the International Monetary Fund said Wednesday.

The easy money policies of the world´s top central banks has fed the problem, stoking a private-sector credit binge in China and rising public debt in some low-income countries, the IMF said in a new report.

Meanwhile, slow economic growth is making it hard for both companies and countries to cut their debt burdens -- a process that can also drag on growth momentum because deleveraging companies slow spending and investment.

Without deleveraging, however, countries run the risk of fresh financial crises that can turn into deep recessions, the IMF´s Fiscal Monitor report says.

"For a significant deleveraging to take place, restoring robust growth and returning to normal levels of inflation is necessary," the fund said.

Getting there requires governments to stimulate growth though investment, certain fiscal and business reforms, and targeted programs to help heavily indebted companies lower their debts.

"Global debt is at record highs and rising," the IMF´s Fiscal Affairs Department chief Vitor Gaspar said.

Public and private debt -- excluding the financial sector´s -- at the end of last year hit $152 trillion, with around two-thirds owed by the private sector, the report said.  Measured against the size of the world economy, it rose from less than 200 percent of global GDP to 225 percent over the 15 years to 2015.

Debt at such levels while economic growth remains tepid heightens the risk of financial crises, Gaspar said.

"High debt levels are costly as they often end up in financial recessions that are deeper and longer than normal recessions," he said in comments accompanying the report.

Moreover, "excessive private debt is a major headwind against the global recovery and a risk to financial stability."

While central banks have had to cut interest rates to support the recovery from the 2008 financial crisis, that has encouraged the debt pileup, the report said.

Dealing with the problem requires governments to implement well-calibrated programs to reduce private debt -- by cleaning up poor balance sheets of European banks and non-financial companies in China.

"Generally, where the financial system is under severe stress," the report said, "resolving the underlying problem quickly is critical."

The Fund said european banks´ weakness looms large on the horizon as threat to global financial system, with thin margins and an unsafe share of poor quality loans.

The Fund’s review of the health of the world´s financial system came as global investor jitters persisted over the fate of Deutsche Bank, Germany´s largest but capital-weak and troubled lender.

Dangers in the near-term have lessened since April, according the Fund, as commodity and asset prices rise and markets adjust to the shocks of Britain´s vote to secede from the European Union.

But trouble is brewing in the medium-term, according to the global crisis lender, which said that more broadly, banks, retirement funds and insurance companies needed to clean their portfolios and adjust to an era of low growth and low rates.

In advanced economies, 25 percent of banks, holding $11.7 trillion in assets, would remain weak even in a cyclical recovery. The solvency of many life insurance companies and pension funds is threatened by the prolonged period of low interest rates intended to stimulate recovery from the Great Recession.  Weak credit demand in advanced economies, in addition to low rates, is also hindering profitability, according to the IMF.

"Since the start of the year, the market capitalization of advanced economy banks has fallen by almost $430 billion, increasing the challenge of addressing banking system vulnerabilities, particularly for weaker European banks," the report said.