Phil Penrose discusses the expansion of global debt in the wake of a stronger US Dollar.
A decade after the global financial crisis, increasing levels of debt in prominent developing economies are driving fears of a new panic that could spread far beyond the disorder being experienced in Turkey right now.
While the Turkish Lira has lost more than 40% of its value in Dollar terms in 2018, this loss of investor confidence might only be a signpost to further debt problems on the horizon for countries like Brazil, Indonesia, Russia and South Africa.
“Turkey is not the last one,” Sebnem Kalemi-Ozcan, an economics professor at the University of Maryland told the Washington Post’s David Lynch earlier this month. “Turkey is the beginning”.
According to the McKinsey Global Institute, total debt is a mind-boggling USD 169 trillion – up from USD 97 trillion on the eve of the Great Financial Crisis.
2008’s crisis spread across borders because European banks ran out of the Dollars they needed to pay back their USD-denominated borrowing. The Fed acted as lender of last resort to the world, offering foreigners USD 1 trillion worth of liquidity. Since then, offshore Dollar debts have roughly doubled. In its leader this month The Economist observed drily that, “Finding ways to make offshore Dollar financing safe, such as pooling Dollar reserves among EM countries, relies on international co-operation of the type that is fast falling out of fashion”.
While a wider crisis may not be imminent, the huge increase in global debt since 2008, means the threat of financial contagion from key developing countries should be taken seriously for fear of damage to US exports and the subsequent threat to its stock market.
The IMF has said the global economy is more deeply indebted than before the financial crisis and countries need to take immediate action to improve their finances before the next downturn. In its half-yearly fiscal monitor it singled out the US for particular criticism, saying that Donald Trump’s fiscal stimulus – a package of tax cuts and spending increases – was leading to a bigger budget deficit at a time when it should be on the way down.
Part of the reason for new concern is because the Fed is raising interest rates from within a US economy in good health. For a country like Turkey, the combination of a stronger Dollar and weakening Lira makes it increasingly costly for borrowers to pay their Dollar debts.
Susan Lund, a co-author of the McKinsey study, offered a balanced view on what comes next: “It is not a general, pervasive problem” Lund said. “We’ve depended on emerging markets to bring up global growth, some of it due to a credit boom. This is going to take a bite out of growth, which will affect the US, Europe and the entire world economy.”
The towering debt held by developing countries may not yet portend a cataclysm of global scale, but the repercussions of it are unlikely to remain isolated within their shores.