Domestic and global debt is now even greater than before the global financial crisis, making the world susceptible to economic and market shocks, S&P Global Rankings has warned.

S&P analysts have found that global debt has risen by around 50% since the 2008 Global Financial Crisis, led by federal governments and Chinese non-financial corporates, while worldwide debt-to-GDP ratios have surged to more than 231%, compared with 208% in June 2008.

Among federal governments, the United States remains in absolute terms the most indebted after swelling its financial obligation by $10.6 trillion over the previous years while China has grown its debt $5 trillion and the Eurozone by $2.8 trillion.

Though household leverage has fallen in the US and the eurozone, China’s has risen and might reach advanced-economy levels on household debt within three years, S&P said.

After the Great Recession, regulators squeezed much of the risk out of U.S. banks. But uncertainty has not faded. Much of it now resides in non-bank financial entities, including commercial lenders, private credit funds, and structured financing cars, many of which have yet to be tested by a deep recession after a nearly decade-long expansion.

The customers consist of mid-sized, speculative-grade companies that have packed up on debt to fuel their expansion. Sometimes one obstacle can push them over the edge, as happened with Trident’s messed up billing system roll out.

“We think credit losses will rise,” said Matt Carroll, a credit analyst at S&P Global Scores. His factors: A lot of cash has streamed into personal credit, lowering lending requirements in a benign economy.

Some $900 billion in non-bank loans to mid-sized companies sit together with another $1.1 trillion of speculative-grade loans that have been made by bank distributes to more significant business and mainly resold to institutional investors. These quantities are overshadowed by the $11 trillion in outstanding U.S. home mortgage loans and most likely are inadequate to drag down the monetary system, as home loans did throughout the 2007-2009 crisis.

Rising non-bank financial obligation has fueled concerns it might make an economic crisis even worse because loan losses could paralyze many non-bank lending institutions, leaving companies most in requirement without access to credit. When you have a real recession, the lender will not be there. So, a lot of these borrowers will be stranded,” JPMorgan Chase & Co chief Jamie Dimon informed analysts in January.

A debt storm is brewing

S&P Global Ratings analyst Alexandra Dimitrijevic explained, “A perfect storm of realised risks across geographies and asset classes could trigger a systemically damaging downturn,” adding, “this downside situation reflects an increased reliance on global capital flows and working secondary market liquidity.”

While utilize is higher, S&P discovered contagion risk is mitigated by high investor confidence in significant western governments’ hard currency financial obligation.

The report also found the high ratio of domestic financing for Chinese business financial obligation likewise reduces contagion danger and, according to S&P, the Chinese government has the methods and the motive to prevent widespread defaults.

Not so bad

Though a downturn may be inevitable, some analysts are hopeful that it might not be as devastating as the 2008 crisis.

S&P Global Ratings credit analyst Terry Chan notes, “Although another credit downturn may be inevitable, we don’t believe it will be as bad as the 2008-2009 global financial crisis. That’s because the increased debt is  largely driven by advanced-economy sovereign borrowing and domestic-funded Chinese companies, thus mitigating contagion risk.”

 

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