Global debt markets burgeoned to an estimated $100 trillion last year, according to the Basel-based Bank of International Settlements (BIS), which also highlighted a growing decline in cross-border lending since the start of the financial crisis.
The BIS - known as the central bank of central banks - released its latest statistics from mid-2013 on Sunday showing the $100 trillion debt issuance figure had risen from a figure of $70 trillion in mid-2007 with governments being the largest providers.
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The stock of public debt securities reached $43 trillion in June 2013, about 80 percent higher than in mid-2007. Debt issuance by non-financial corporates grew at a similar rate, albeit from a lower base," analysts Andreas Schrimpf and Branimir Gruic said in the report released on Sunday.
The BIS noted that since the financial crash of 2008 there has been a shift in how money is borrowed -- increasingly through debt markets rather than bank lending. With the financial sector curbing lending and opting for more deleveraging, governments have issued debt in their place to kickstart their economies and bail out the financial sector.
The sheer scale of global debt markets is going to remain a very significant factor in the future, according to Bill Blain, a senior fixed income broker at Mint Partners, who predicts that it will keep growing as long as there is demand. He said that new regulations ensure that the financial sector will remain in a "trough" but governments would keep the trend going despite reining back on spending.
This rise in debt issuance only poses a problem if inflation was to rise sharply while there was still slack in the economy, according to Peter Chatwell, an interest rate strategist at Credit Agricole Corporate. This would then force central banks to tighten policy forcefully and destabilize the recovery, he added.
Schrimpf and Gruic noted that sluggish lending from the financial sector - who traditionally lend to international markets - has left a dent in cross-border investment in global debt securities. The share of debt securities held by cross-border investors either as reserve assets or via portfolio investments fell from around 29 percent in early 2007 to 26 percent in late 2012, they said.
"This reversed the trend in the pre-crisis period, when it had risen by 8 percentage points from 2001 to a peak in 2007. It suggests that the process of international financial integration may have gone partly into reverse since the onset of the crisis," they said in the report.
This is a "headache" for policy-makers, according to Kit Juckes, global head of foreign exchange strategy at Societe Generale. Banks are increasingly drawing their business in to their home countries – a move that is not helpful for growth, and reflects investor and bank caution as a result of the great recession and the European peripheral crisis, he said.
"It isn't healthy to see money flow less freely around the global economy, but on a positive note, this is likely to be ever so slowly reversed and normalized in the years ahead," he said, adding that as deleveraging enters its final stages "re-globalization" instead of deeper "balkanization" would occur.
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