The Federal Reserve Bank of New York headquarters in New York in 2008. Marketable U.S. government debt outstanding has soared to a record $12 trillion, from $4.5 trillion in 2007, according to U.S. Treasury data compiled by Bloomberg. Illustrates DEBT-GLOBAL (category f) by John Glover (c) 2014, Bloomberg News. Moved: Monday, March 10, 2014 (MUST CREDIT: Bloomberg News photo by Daniel Acker).
Global debt has soared to $100 trillion since 2007
- Article by: John Glover
- Bloomberg News
- March 10, 2014 - 9:44 PM
LONDON – The amount of debt globally has soared more than 40 percent to $100 trillion since the first signs of the financial crisis as governments borrowed to pull their economies out of recession and companies took advantage of record low interest rates.
The $30 trillion increase from $70 trillion between mid-2007 and mid-2013 compares with a $3.86 trillion decline in the value of equities to $53.8 trillion, according to the Bank for International Settlements (BIS) and data compiled by Bloomberg. The jump in debt as measured by the Basel, Switzerland-based BIS in its quarterly review is almost twice the U.S. economy.
Borrowing has soared as central banks suppress benchmark interest rates to spur growth after the U.S. subprime mortgage market collapsed and Lehman Brothers’ bankruptcy sent the world into its worst financial crisis since the Great Depression. Yields on all types of bonds average about 2 percent, down from more than 4.8 percent in 2007, according to the Bank of America Merrill Lynch Global Broad Market Index.
“Given the significant expansion in government spending in recent years, governments [including central, state and local governments] have been the largest debt issuers,” said BIS analyst Branimir Gruic and Andreas Schrimpf, an economist for the organization, which is owned by central banks and hosts the Basel Committee on Banking Supervision, which sets global capital standards.
In the six-year period to mid-2007, global debt outstanding doubled from $35 trillion, according to data compiled by BIS.
Marketable U.S. government debt outstanding has soared to a record $12 trillion, from $4.5 trillion in 2007, according to U.S. Treasury data compiled by Bloomberg. Corporate bond sales globally surged during the period, with issuance totaling more than $21 trillion, Bloomberg data show.
Concerned that high debt loads would cause international investors to avoid their markets, many nations resorted to austerity measures of reduced spending and increased taxes, sacrificing their economies as they tried to restore the fiscal order they abandoned to fight the worldwide recession.
“To get out of debt, you need prudence and you need pro-growth structural reforms,” said Holger Schmieding, chief economist at Berenberg Bank in London. “Those are long-term processes. You can’t get out of debt too quickly or your economy collapses, as we saw in Greece.”
Adjusting budgets to ignore interest payments, the International Monetary Fund (IMF) said late last year that the so-called primary deficit in the Group of Seven countries reached an average 5.1 percent in 2010 when also smoothed to ignore large economic swings. The measure will fall to 1.2 percent this year, the IMF predicted.
Rising debt did little to diminish demand for fixed-income assets. Bonds worldwide have returned 31 percent since 2007, including reinvested interest, according to Bank of America Merrill Lynch index data. Treasury and agency debt handed investors gains of 27 percent, while corporate bonds returned more than 40 percent, the indexes show.
“Total debt levels, the sum of household, government and corporate debt, haven’t declined at all in recent years,” said Ben Bennett, a credit strategist in London at Legal & General Investment Management, which oversees the equivalent of about $120 billion of corporate bonds. “Each time there’s a wobble, the central banks turn on the taps. Either that works by creating growth with asset prices eventually coming into line with fundamentals, or it doesn’t and we’re in for a massive fall.”
Bond investors haven’t penalized sovereign issuers such as the United States, Britain, Japan and France for losing their top credit ratings. While Standard & Poor’s stripped the United States of its AAA ranking in August 2011, Treasuries moved in the opposite direction from what the downgrade suggested and yields touched a record low of 1.38 percent in 2012.
Yields on U.S. government bonds have dropped 2.3 percentage points since 2007 to an average 1.6 percent, according to Bank of America Merrill Lynch bond index data. Corporate yields have declined 2.6 percentage points to 2.9 percent.
Faster growth is deflecting concern about high debt loads. In the United States, the government will borrow less money this year than at any time since 2008, validating the nation’s decision to go deeper into debt to combat the financial crisis as a stronger economy shrinks the deficit, based on a January survey of the Wall Street’s biggest bond dealers.
© 2014 Star Tribune