WASHINGTON, Oct 6, (Agencies): The world is swimming in a record $152 trillion in debt, the IMF said on Wednesday, even as the institution encourages some countries to spend more to boost flagging growth if they can afford it.
Global debt, both public and private, reached 225 percent of global economic output last year, up from about 200 percent in 2002, the IMF said in its new Fiscal Monitor report.
The IMF said about about two thirds of the 2015 total, or about $100 billion, is owed by private sector borrowers, and noted that rapid increases in private debt often lead to financial crises.
While debt profiles vary by country, the report said that the sheer size of the debt could set the stage for an unprecedented private deleveraging that could thwart a still-fragile economic recovery.
“Excessive private debt is a major headwind against the global recovery and a risk to financial stability,” IMF Fiscal Affairs Director Vitor Gaspar told a news conference. “Financial recessions are longer and deeper than normal recessions.”
While the United States has de-leveraged since the 2008-2009 financial crisis, the report cited the buildup of private debt in China and Brazil as a significant concern, fueled in part by a long era of low interest rates.
The report comes as IMF managing director Christine Lagarde is urging the Fund’s 189 member governments that have “fiscal space” – the ability to sustainably borrow and spend more – to do so to boost persistently weak growth.
The Fund’s call for targeted fiscal support for consumer demand comes is accompanied by calls for continued accomodative monetary policy and accelerated structural reforms aimed at boosting countries’ economic efficiency.
If a major deleveraging of private debt were to occur, the IMF report recommends that fiscal policy should include targeted interventions to restructure private debt or repair bank balance sheets to mininize damage to the overall economy.
These could be similar to the mortgage restructuring programs undertaken by the United States during the crisis or the Obama administration’s automotive industry restructuring, Gaspar said.
“These types of policies could be particularly useful in China,” Gaspar said. “But in order to work, they need to be adequately designed and subject to strong governance principles.”
Meanwhile, IMF chief Christine Lagarde called strongly Thursday for action around the world to revive growth and tackle inequality, singling out Germany, Canada and South Korea to provide stimulus.
“What is key is now action, so my message to the members of the IMF tomorrow will be, “Action, please,” Lagarde told reporters in Washington at the opening of the International Monetary Fund and World Bank’s annual meetings.
The IMF this week forecast “subdued” global growth of 3.1 percent in 2016, rising to 3.4 percent next year, with the developing world expected to outpace advanced economies.
“My hope at the end of the annual meeting is that each finance minister, each governor of a central bank, will go back home thinking, ‘What can I do in order to propel that growth which is currently too low, for too long benefiting too few?’” said Lagarde.
Lagarde pointed to three leading economies as examples of states that have the financial wherewithal to spend more to accelerate growth.
“We believe that some countries have fiscal space. Well if so, the should use it,” she said. “We are certainly including in that category countries like Canada, like Germany, like Korea.”
Meanwhile, Lagarde gave Deutsche Bank some tough advice on Thursday, saying Germany’s biggest lender needed to reform its business model and reach a rapid deal with US regulators over a potentially huge fine.
A senior European official tried to shore up confidence in the continent’s banking system, saying it was working well overall, while sources said Germany’s financial watchdog had found no evidence so far that Deutsche violated money laundering rules in Russia, possibly relieving one of its many headaches.
However, Lagarde did not mince her words about the problems of Deutsche — which the International Monetary Fund has identified as a bigger potential risk to the financial system than any other global bank — in an era of ultra low interest rates.
“Deutsche Bank, like many other banks, has to look at its business model,” she told Bloomberg Television during the IMF and World Bank’s autumn meetings in Washington.
“It has to look at its long-term profitability — given the lower-bound interest rates we have around the world and probably for longer than many expect — and decide what size it wants to have and how it wants to strengthen its whole balance sheet.”
Germany’s flagship bank is under heavy pressure as it fights a penalty of up to $14 billion that the US Department of Justice (DOJ) plans to impose for misselling mortgage securities, its latest setback that sent its shares to a record low last week and worried clients.
Deutsche is in the midst of a deep overhaul that includes slashing a workforce of around 100,000, revamping information technology and selling non-core assets. It struck another deal on Thursday with its works council to cut a further 1,000 staff in Germany, bringing total job losses there to 4,000.
Lagarde acknowledged that Deutsche was selling assets but underlined the importance of reaching an out-of-court settlement with the DOJ.
“A bad settlement is always better than a good trial,” she said, adding that Deutsche was “not in a trial mode”.
“A settlement would … would deliver some certainty as to what weight the bank will have to carry and whether it matches with its provisions or not. So the sooner, the better,” she said.
Deutsche has already spent 12 billion euros ($13.4 billion) on litigation since 2012, and says it has put aside 5.5 billion euros for its expected legal bill. This is far less than the top end of a possible DOJ fine, although other banks have negotiated their penalties down to much smaller sums and Deutsche hopes to do the same.
Nevertheless, uncertainty remains over the provisions amount. “We reckon that … may be insufficient to cover all ongoing litigation cases,” Scope Ratings said in note on Thursday.
Deutsche’s share price has staged a small recovery from the record low but remains down 43 percent from the beginning of the year.
A top shareholder, however, said the sell-off was overdone. “To us, Deutsche Bank is not a bank in crisis,” Frank Engels, head of fixed income at Union Investment, said.
European Commission Vice President Valdis Dombrovskis said that the bloc’s banking sector was working well despite problems at individual institutions in Germany or Italy. “Overall, the banking sector seems to be heading in the right direction,” he told reporters in Washington.
Deutsche Bank also got some positive signals from its home market on one of its other major litigation cases. The Bafin financial watchdog has found no evidence to date that it violated money laundering rules in Russia, people close to matter said.
But regulators in Russia, Europe and the United States are also investigating it over “mirror trades”. These may have allowed clients to move money from one country to another in 2014 without alerting authorities, potentially enabling them to breach Western sanctions on Russia over the Ukraine conflict
Bafin declined to comment on its investigation.
The British Financial Conduct Authority as well as the DOJ and the Department of Financial Services have each launched investigations into whether any European or US sanctions against Russian individuals were violated.