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The world’s debt is alarmingly high. But is it contagious?

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  • Mon, Feb 22, 2016 - 07:45pm



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    The world’s debt is alarmingly high. But is it contagious?


Trend is down in the US equity market, and in the economy, so that's what we have to look forward to going forward.  But in re-reading the 2008 timeline, I am reminded of just how dreadful the series of events were that happened during that period.


This article on debt levels seems relevant, even if the analysis is limited. 

The world's debt is alarmingly high. But is it contagious?

The fact that rich-country sovereign debt is not mentioned is unfortunate considering that gov't debt increased faster from '07 to '14 than any other category:

Source – McKinsey

But it has some good arguments regarding Chinese and other emerging market debt.

Some interesting parts (parsed together):

The world has continued to borrow hand over fist since the financial crisis, adding nearly $60 trillion since 2007 in the process of pushing the worldwide debt load to $200 trillion, or nearly three times the size of the entire global economy.

The potential for disaster depends on how contagious a new round of defaults would prove and whether writedowns in one part of the world could cause losses in others. 

Since 2009, the average level of private debt in emerging economies has gone from 75 percent of GDP to 125 percent, according to the Bank for International Settlements. Private debt levels in China and Brazil are now double the size of the national economy.  

Hedge fund billionaire Kyle Bass, who made a fortune betting against the U.S. subprime crisis, is telling his investors that China's state-owned banks may take losses upward of $3.5 trillion—four times more than what U.S. banks got hit with during the 2008 financial crisis.  

 The trouble is that no matter how much credit gets added to its economy, China's slowdown is inevitable. Adding leverage to an already leveraged system may only make the reckoning more painful.  

So long as China's government is willing to backstop the country's banking system—and so far all indications are that it is—there's little chance of liquidity freezing up like it did in  the fall of 2008 when U.S. banks started running out of money.

"As soon as a [Chinese] bank or a company looks at risk, the government will just swoop in. So it's the strongest link that matters." The problem, he says, is that China ends up pouring good money after bad, rather than investing in growth.

 [Moving beyond China,] more countries have floating exchange rates than in the past, giving them the flexibility to devalue in the face of a rising U.S. dollar. "That's made a tremendous difference," says Kenneth Rogoff, an economist at Harvard who has written extensively on the nature of debt. "In my opinion, floating exchange rates are the only reason Russia and Brazil haven't had a financial crisis yet."

Any attempt to forecast the risk of global debt crisis wouldn't be complete without revisiting one of the main culprits from 2008: the dreaded credit-default swap….Today, the total CDS market is a fraction of that inflated size, having steadily shrunk down to $16 trillion by the end of 2014, according to the Bank of International Settlements. Things may still go bad, but, like always, whatever goes wrong will be different from the last time.      Source