Global debt, trade wars could cripple world economy - Lagarde
IMF Chief Christine Lagarde
IMF boss Christine Lagarde is warning that increasing trade wars and mounting global debt could cripple the world economy.
Speaking at the University of Hong Kong, Lagarde said trade tensions between the United States and China could spell an era of protectionism that would threaten the world’s multilateral trade system.
“ The multilateral trade system has transformed our world over the past generation. But that system of rules and shared responsibility is now in danger of being torn apart. This would be an inexcusable, collective policy failure,” said Lagarde.
US President Donald Trump has called for the imposition of tariffs and points to Germany’s trade imbalance. He has also insisted that China should not be allowed to flood the U.S. market with cheap goods while American firms do not get full access to the world’s highest populated country.
“The IMF chief explained : “ Tariffs not only lead to more expensive products and more limited choices, but they also prevent trade from playing its essential role in boosting productivity and spreading new technologies. Countries should steer clear of protectionism in all its forms.
“ Let us redouble our efforts to reduce trade barriers and resolve disagreements without using exceptional measures.”
Lagarde warned about the world’s escalating public and private debt which now stands at a whopping US$164 trillion dollars of which two-thirds are held by the private sector.
Easy liquidity and underwriting together with low interest rates have contributed to a spike in the number of highly leveraged firms.
According to Standard & Poor’s between 2011-2017, global non-financial corporate debt grew by 15 percentage points to 96 per cent of GDP.
The rating agency is warning that high corporate debt could trigger the next default cycle.
“ When debt is this steep and default rates are low, something’s gotta give. A material repricing in bond markets or faster than expected normalization in money market rates could impact credit profiles,” said S&P.
Very low borrowing costs has built up more debt than any time since the end of the Great Depression.
This has allowed companies to grow faster but makes them vulnerable when borrowing costs increase.
Public debt is currently at historic highs – in excess of 225 per cent of GDP. In the last 10 years, emerging economies have been responsible for most of this increase.
Speaking earlier this week at the IMF’s World Economic Outlook’s Spring Meeting in Washington, the IMF’s chief economist Maurice Obstfeld, said, “ The present good times will not last for long.”
The Managing Director of the IMF said: “ In countries where public debt is already high, careful management of financial terms is critical.”
She went on to add that rising indebtedness across Asia and Africa following on from China’s “ Belt and Road Initiative” poses risks to the global economy as smaller countries may be borrowing more money than they can pay back.