In any economy, a healthy amount of debt creation is required in order to support economic expansion. Too much debt however, can cause financial distress, possibly resulting in a debt crisis.
Productive debt can be used as a way to fuel growth and support real economic activity. Unproductive debt, on the other hand is more likely to be in the form of excessive credit card debt that pushes consumer spending beyond sustainable levels.
As more consumers rack up more debt at a household level, this also has a ripple effect on the economy in general. As governments borrow money for infrastructure needs, this also has a plausible effect on global debt levels.
Current debt levels, of which two thirds is privately held, are at a record high.
Three types of debt can be considered to form the nucleus of global debt, namely:
- Government (or public debt)
- Corporate debt
- Household debt
The International Monetary Fund (IMF) recently found that debt in the non-financial sector of the world economy has doubled in nominal terms since the turn of the century, reaching $152 trillion last year and continuing to rise.
Taking a further look at current global debt:
Harsh economic conditions globally have caused a rapid rise in household debt. Too much government spending is also said to be the cause of mounting financial problems.
The IMF report also found that in emerging market economies, around 11 % of corporate debt, over $400 billion, was held by firms with “weak repayment capacity”. This clearly doesn’t bode well for the outlook on current global debt.
The longer interest rates are kept low, the more unproductive debt build-up is encouraged.
Many financial experts are cautioning about another potential global financial meltdown if current global debt levels aren’t curbed.