The world is currently facing
tremendous risks. In the United States, the government has been shut down for
almost a month. In Europe, populism is rising with countries like France and
Germany being casualties. The emerging markets too are not at ease. Worse, the
global economy is going through a slowdown. Another key issue that investors
must contend with is global debt.
Yesterday, International Finance,
a Washington-based organization released a shocking report on global debt. The
report showed that debt had increased to more than $244 trillion. This number
is three times the size of the global economy. The report also said that the
debt had grown by 12% since interest rates started rising. It currently
represents 318% of GDP. In 2000, the debt was 170% of GDP.
The debt has grown in all sides.
Countries have accelerated borrowing while companies around the world too have
done the same. For example, the national debt of United States has grown by
more than $10 trillion in the past ten years. It is now at more than $21
trillion.
In the developed countries,
companies have taken advantage of low interest rates to increase their
borrowing. The total non-financial corporate debt has risen from $3.3 trillion
in 2007 to the current $6.2 trillion. All this has happened at a period of
sustained global stability. In addition, most of the debt has gone to mergers
and acquisitions (M&A), dividends, and share buybacks. This has happened as
investors have continued to demand excellent performance for the companies.
Indeed, the size of large mergers and acquisitions have increased. In 2018,
deals worth more than $3.3 trillion were announced in the United States. A
recent report found that companies in the oil and gas sector alone had
accumulated more than $300 billion of debt. A company like AT&T has total
debt of more than $170 billion.
In the developing countries
especially those from Africa, the amount of debt has continued to increase.
Most of this toxic debt has come from China, which is funding corrupt and
vulnerable governments. For example, a recent report said that China was
considering taking over a Kenyan port because the country has been unable to
pay debt.
The same debt growth has been
seen in the emerging markets with countries like Argentina and Brazil being forced
to be rescued.
The topic of debt is an important
one because it presents a lot of risk to the global community. As you recall,
the past crisis was caused by increased redundancies in the housing market. The
next one could be caused by increased leverage by countries, companies, and
individuals. In fact, the treasuries, which are good indicators of what
investors expect have been rising, a sign that things could be bad.
As a trader, you need to be aware
of the risks caused by increased debt at a time when, global growth is slowing
and central banks are hiking rates. By having a good understanding of these
trends, you will be at a good position to manage risk in your trading.
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