The 16th annual Geneva Report has warned that the world could face a new financial crisis. The report puts the danger down to low growth and rising global debts mixed into a “poisonous combination.”
In spite of concerted efforts from governments around the world to cut both public and private borrowing, global debts have spiralled to record high levels. Though household debt in Europe, including the UK, has seen a modest drop, this has been offset by borrowing activity in Asia. In particular, the economists responsible for compiling the report are concerned about heavy borrowing in China, which they fear may leave a lasting impact on the world economy.
Last year saw global debt rise from 180% of global economic output to 212%, the highest ever recorded level of borrowing. These figures exclude the financial sector.
The annual Geneva report is compiled by senior economists from within the finance industry and the academic sphere, and commissioned by the International Centre for Monetary and Banking Studies.
Through the report, many policymakers around the world are accused of failing to seize an opportunity to create sustainable growth. This, the report contends, could have been achieved by taking advantage of historic low levels in interest rates while at the same time taking measures to deter lenders from providing excessive levels of credit.
The report also called for the EU to write off the debts of some of the most severely affected companies within the Eurozone, whilst also launching an urgent and “sizeable” program designed to keep interest rates low in the long term.
A few months ago, the Bank of International Settlements (BIS) carried out a study which identified extremely similar issues in the global economy. However, the suggested solution was different, as the BIS insisted that higher interest rates were the only way to tackle the issue and curb excessive, high-risk lending.
Both reports were concerned about the high levels of borrowing currently being seen in China, particularly by businesses and local authorities, and Beijing have been urged to take steps to put a stop to this. Although this would initially slow growth, the economists maintain that it is ultimately for the best economically both on the global level and for China themselves.
According to report co-author Luigi Buttiglione, who holds the position of head of global strategy for the Brevan Howard hedge fund, “Over my career I have seen many so-called miracle economies – Italy in the 1960s, Japan, the Asian tigers, Ireland, Spain and now perhaps China – and they all ended after a build-up of debt.”
