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The level of the global debt stock relative to GDP remains near its record high, though it has stabilized over the past five years. The sustainable level of debt to GDP is not, however, a constant and there are reasons to believe that the lower trend real rate will likely support sustainability. While less expected, however, a relatively small increase in the trend rate could lead to a reassessment of debt sustainability.
While there is evidence that the level of debt, as opposed to the growth rate, does not appear to be a good predictor of recessions and financial crises, the level does seem to be associated with depth of losses when crises occur. The historically high level of debt may generally suggest a higher vulnerability in periods of stress.
The composition of debt, within the aggregate numbers, has changed since the crisis. Emerging market debt has grown as a proportion of the global debt stock, over the past 10 years, with much of the increase driven by China.
Advanced economy public debt has risen but household and financial sector debt is lower now and the lower post crisis levels have been stable for a number of years. Advanced economy corporate debt, however, has grown rapidly in recent years in some major jurisdictions, particularly the US, and its riskiness has increased. The pricing of risk in financial markets is relatively compressed by historic standards, as is market volatility. But recent events suggest the market may be very sensitive to changes in expectations of growth or inflation.
As always, the risk picture is mixed. From a financial stability perspective, the right response to this picture is to ensure that the financial system is sufficiently resilient to a very severe but plausible correction in values should it occur.
Mr Cunliffe concluded: “A colleague of mine recently asked me why the financial stability side of the Bank was so gloomy, always pointing to risks on the horizon and seeing the glass as half empty at best? My answer was that it was our job to worry about what could plausibly happen - and to ensure that if it did happen, the glass did not suddenly empty entirely.”