Experts warn of looming financial crisis in wake of high debt levels

Martin Young from the ASFRC says global debt is up 318% relative to GDP.

PETALING JAYA: A group of financial academics today warned of the possibility of a financial crisis in Asia, in light of the mounting global debt levels.

The Asian Shadow Financial Regulatory Committee (ASFRC) said global debt levels were continuing to rise at approximately US$244 trillion (RM1,002 trillion), an increase of US$27 trillion (RM100 trillion) from 2016.

It cautioned that the rising debt levels would have significant implications for the stability of the financial market as well as the likelihood of a crisis.

In a media briefing here, Martin Young from the ASFRC said global debt was up 318% relative to GDP. This is higher than the ratio of 290% during the global financial crisis of 2008.

“The continuing rise in the level of debt against a backdrop of tightening financial conditions is a cause for concern,” he said.

He also said the excessive aggregated debt levels were the primary reason for the financial crisis in 2008. He cautioned that there was now less room to react to a similar debacle, from both a monetary and fiscal perspective.

According to the Bank of International Settlements, the banking sector also indicates increased system fragility. Net international bank balance sheet positions show evidence of refinancing risks and interest rate risks which existed prior to the 2008 global financial crisis.

“Since the 2008 financial crisis, borrowing has increased substantially and this overhang of global debt is starting to be stressed,” said Young.

Corporations and households have responded to a low interest rate regime by piling on debt. This has led to asset bubbles, share buybacks and buoyant consumer spending.

Young said one major concern of the debt saga in developing economies was the financing of domestic debt in offshore markets which led to sensitivity to offshore market volatility and domestic currency depreciation. He warned that collectively, these factors would increase financial vulnerability to debt default, the bursting of asset bubbles and contagion, possibly to Asian economies.

The ASFRC recommended that sources of bank lending from non-core deposits be clearly ascertained. It said this would give central banks better control over their lending portfolios.

It also advised regulators to look beyond Basel 3 conditions to increase capital adequacy requirements.

The ASFRC also mooted the idea of implementing initiatives to reduce dependence on the US dollar by the usage of local currency for the issuance of corporate bonds.