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Speech by Mr Hervé Hannoun, Deputy General Manager of the Bank for International Settlements, prepared for the 50th SEACEN Governors' Conference, linked to global debt overhang.
There is no hard and fast rule to tell exactly when debt is excessive, but Hannoun believes there are signs that debt is already well past safe levels in many advanced economies. Financial market participants remain largely complacent about this risk. But they are apt to change their minds abruptly.
With some exceptions, emerging market economies are in better shape than advanced economies, but they too are not immune to the risk of excessive debt. The pace of debt accumulation has indeed accelerated in emerging markets since the start of the crisis.
He structures his intervention into three main parts:
Hannoun concludes by summarising the main points of my intervention. Total non-financial debt had risen substantially over the last 15 years. Public finances are not yet under control. Debt is excessive and poses a serious risk in a number of countries.
This debt overhang partly arises from the asymmetric conduct of macroeconomic policy, or an easing bias, in advanced economies since the early 2000s. This has been part of a debt-driven growth model. If governments’ efforts to consolidate their finances were to falter, under repeated calls for an end to “austerity”, central banks would come under increasing pressure to keep interest rates at the current near-zero levels.
However, any failure to normalise monetary policy is a high-risk strategy. The continuation of very low interest rates might end up encouraging even more debt. It might push investors to take on excessive financial risk. And it may damage the supply side of the economy, by worsening credit misallocation and inducing policymakers to postpone essential growth-enhancing reforms. In this sense, continued unconventional monetary policy can buy more stability now, but at the price of lower average growth and greater financial instability in the future. In other words, the risk of debt deflation is not eliminated, but simply postponed.
A gradual increase in saving by highly indebted economic agents is the only acceptable solution to the debt overhang problem. Efforts to deleverage will inevitably weigh on economic growth for a long time. But default, debt restructuring, higher inflation and financial repression may end up imposing much heavier costs on society, including the possibility of unintended distributional consequences. If growth continues to disappoint, the reaction against rising inequality can only be expected to grow. This means that the unavoidable deleveraging will only be acceptable to society if policymakers make the reduction of inequality a key part of their policy framework.