Central bankers from the U.S., India and Malaysia pointed to debt as a key factor holding back the global economic recovery from the financial crisis.
The bankers noted that governments, consumers and businesses in many economies had borrowed funds both prior to and after the global financial crisis, but later needed to trim their debts. This collective deleveraging has been acting as a headwind to global growth, with the World Bank cutting its global economic growth forecast to 2.4 percent from January's estimate of 2.9 percent. That compared with 4.4 percent growth in 2006.
"Some of it has to do with the debt that was taken on pre-crisis and the deleveraging that is taking place in country after country, including the fact that emerging markets themselves expanded leverage post crisis and some of them are now deleveraging in response to the excess debt they've taken on," Raghuram Rajan, the governor of the Reserve Bank of India (RBI), said at a conference of central bankers and financial regulators on the Indonesian island of Bali.
"Clearly, across the world, demand has been held back by a spate of first a boost in demand from debt and then deleveraging," Rajan said.
The other two central bankers also pointed to debt levels.
Dr. Zeti Aziz, who recently retired as Malaysia's central bank chief after serving from 2000-2016, added that it wasn't just public indebtedness hurting fiscal spending, but also private sector debt weighing on growth.
By 2020, global business debt likely will climb to $75 trillion from its current $51 trillion level, S&P Global Ratings said in July.
Total debt among more than 2,000 U.S. nonfinancial companies swelled to $6.6 trillion in 2015, dwarfing the $1.84 trillion in cash on their balance sheets, according to a study released in May by S&P Global Ratings. The ratio of cash to debt is the lowest it's been in about 10 years, or just before the global financial crisis.
New York Federal Reserve President William Dudley noted that in the U.S., the economy took a major hit from high debt levels in the aftermath of the crisis as spending dried up at the government, consumer and corporate levels.
"The housing bust created a large housing supply overhang and a large number of households that were underwater on their mortgages," he noted. "Households needed to repair their balance sheets and bring down their debt service burdens to more manageable levels."
At the same time, credit availability for businesses dried up as banks worked to repair their own balance sheets, he added.
On the public level, "the crisis led to a very significant deterioration in the U.S. federal budget deficit and put pressure on state and local budgets as well," he said. "The view was that the U.S. needed to do fiscal consolidation and that occurred also at the state and local level and that constrained economic activity rather than supporting economic growth."
But Dudley noted that the U.S. recovery had been relatively better compared with Europe and Japan, attributing it largely to a relatively quick post-crisis deleveraging.
"In the U.S., household balance sheet repair occurred relatively quickly. This happened in part due to the housing foreclosure process wiping out many mortgage debts. So people's debt burden fell because they lost their homes and their debt was wiped out," he said, adding that the drop in interest rates also lowered the debt servicing burdens.
Banks also recapitalized relatively quickly, he added.
But Zeti, who was the first woman to lead Malaysia's central bank, noted that quick deleveraging also had consequences.
"In the U.S., there were foreclosures and this immediately reduced the debt. That is one way of doing it. But it is a little bit harsh on the asset owner," she said, adding that Malaysia took a "less harsh" route.
"In Malaysia, we have extensive policies and mechanisms in place to restructure debt, not only of the corporate sector, but also of small businesses and of the household sector," she said.
That's a policy that "goes hand in hand" with reducing inequality, she said.
"Rising inequality is another dampener on consumption, because those with the highest propensity to consume have the least potential to consume," she said.
However, Rajan noted that one cause of slow growth may come from continued easy monetary policy globally.
"Perhaps the pressure on poorly performing firms to get out of business has been lower than otherwise," he noted. "What is called the zombie problem by some economists in Japan may be more prevalent than in other areas of the world because if easy access to finance."
But Rajan also noted that it wasn't clear that returning to pre-crisis growth levels would necessarily be positive.
"Some of these reasons for slow growth were masked by the extreme amount of debt that was taken on that gave an oomph to growth but which is now holding it back," he said. "The question we have to ask ourselves is, 'is it possible to go back to the pre-crisis levels of growth and should we try very hard to get there?' And I think at least one answer is it's not possible, it's not sustainable and perhaps we should be content with slower rates of growth while we do the reforms that are necessary to boost levels of growth."