Economists, government planners and global decision makers around the world were shocked recently when the International Monetary Fund released two annual reports warning about a coming crisis. In their “World Economic Outlook” and “Financial Stability” reports, the IMF said the global economy is infected with indebtedness that is approaching crisis levels.
The reports, which have been the center of discussions at United Nations Financing for Development meetings in New York this week, warning that if moves are not taken to address the problem shortly, a debt crisis could ensue. The debt problem will only be magnified by global OTC derivatives exposure, economists at an IMF and United Nations-sponsored panel discussion revealed.
For the past ten years, the global economy has been growing, and on a sustainable path, the IMF has reported in typically polite and diplomatic language. But the warnings contained in recent reports have been the focus of concerned global leaders attending UN meetings in New York this week, said Eric LeCompte, Executive Director of Jubilee USA and a UN consultant on sovereign debt.
The IMF’s World Economic report, while pointing to a robust economy, also tempered that commentary by saying “favorable growth rates won’t last” and “risks beyond the next several quarters lean to the downside.” The report echoed concerns voiced in a January report.
In its Financial Stability report, the IMF issued clear warnings regarding debt, advising governments to address the problem and noting that “short-term risks to financial stability have increased.” Another IMF report, Managing Debt Vulnerabilities in Low-Income and Developing Countries, expressed similar concerns.
In a separate IMF Fiscal Monitor report, total debt tallied to a record $164 trillion in 2017, leaving a global debt to GDP level of 225%. The Bank of International Settlements, meanwhile, notes that there is $415 trillion in derivatives contracts tied to interest rates, an issue that was addressed at the United Nations this week alongside debt concerns.
LeCompte, attending the UN meetings, said that discussions were “less diplomatic” than usual as concerns were raised that a debt crisis could materialize if steps are not taken to avert the problem.
Looking at the emerging world economy, sovereign debt has reached levels where it is becoming non-productive. In areas such as Africa, for instance, debt to GDP levels is reaching 55%, up from 30%. “When debt in the developing world reaches 55%, the increased debt is used to make interest payments and does not go directly into the Economy,” LeCompte notes.
But it is not the developed world where debt is a rising concern. As fears of spreading populism have gripped the political class in the US and Europe, proposals for a universal basic income and, in the US, tax cuts are likely to create significant deficits. The US is the only developed country where public debt-to-GDP is expected to rise from 108% to 117% in 2023, a move primarily attributed to the tax cuts, according to Vitor Gaspar, director of the fiscal affairs department at the IMF.
Beyond tax cuts, a potential basic income proposal, which is also being discussed at IMF meetings, is estimated to cost nearly $900 billion, assuming $12,000 given to US adults and $4,000 to children.
As the IMF looks at the financial landscape, it sees debt levels moving to unsustainable levels and speculative financial behavior, led by the roll-back of Dodd-Frank legislation, creating a toxic brew. “This is the formula that ushered in the 2008 financial crisis,” LeCompte said, noting his surprise that the IMF would be considering a universal basic income at the same time they are expressing grave concern over debt levels. He said concerns over rising populism, mainly if there is an economic downturn, are driving the IMF to get ahead of the issues.
The IMF, for its part, has been working to create processes and methods to help governments keep a lid on debt, so it remains manageable. The question remains: will it be too late?
