A prolonged period of low interest rates, initiated when central banks slashed benchmarks as part of the toolkit engaged to counter the effects of the global financial crisis, has seen many corporates take advantage of the favorable terms to issue aggressive levels of debt.
Yet the ongoing low interest rate environment has also made it more challenging to erode outstanding debt balances,which can be more easily repaid in a climate of higher inflation. Indeed,the IMF warned that the dynamics of the current situation resembled a negative feedback loop, in which debt deflation is causing the real burden of debt to increase, leading to poorer economic growth and yet further deflation.
The IMF acknowledged the decreasing menu of options available to policymakers to trigger effective actions, saying the room for maneuver had shrunk since the beginning of the global financial crisis. It also called on fiscal, monetary and structural solutions to be looked at synergistically to maximize their impact.
The organization has sought to pinpoint where it sees the biggest potential problem areas, saying private debt is high not only among advanced economies but also in a few "systemically important" emerging market economies, namely Brazil and China.