Global debt has hit another high, climbing to $247 trillion in the first quarter of 2018, according to a report published Wednesday. Of that figure, the non-financial sector accounted for $186 trillion.
The debt-to-gross domestic product (GDP) ratio has exceeded 318 percent, marking its first quarterly rise in two years, the report by the Institute of International Finance (IIF) said. This is amid record levels of corporate and household debt in many mature markets.
The unprecedented debt load is one of several investor concerns, in addition to worries about the Federal Reserve’s monetary policy tightening and the impacts of a trade war.
It's the debt in the corporate sector that market players should be worried about, said Joseph LaVorgna, chief Americas economist at Natixis.
“The corporate sector is highly leveraged and could be very vulnerable to higher interest rates,” he warned, explaining in a research note that a primary reason corporate debt-to-GDP is so high is thanks to interest rates being historically low due to quantitative easing and forward guidance.
“Firms have used artificially low rates to borrow in the capital markets and only buy back stock in the equity market,” LaVorgna said. “The inherent instability of debt over equity financing suggests that the next downturn could hit investment spending unusually hard.”
Market volatility and likely inflation due to a trade war, which is currently brewing between the U.S. and China, could in this case have an outsized effect on assets, analysts have cautioned. But, so far, markets have been surprisingly resilient, according to Mike Thompson, president at S&P’s Investment Advisory Service.
“The eclectic and somewhat volatile style and the way this stuff comes up — we’re talking about $200 billion of a $17 trillion dollar trade, it’s more meaningful than in the past,” he said, referencing President Donald Trump’s latest tariff threat on $200 billion worth of Chinese goods. “But markets have done a good job of becoming more and more desensitized at the trade rhetoric.”
Stock futures were down across the board for the U.S., Europe and Asia on Wednesday morning, contradicting Thompson’s assertion. But he dismissed fears that a downturn in markets would be sustained.
“The market will dip and then come back,” he said. “You can’t be too short-term with this, because if you reacted to everything you’d really as an investor blow yourself up. A lot of this is the market trying to figure out what’s really going on here.”
Other high-profile figures have issued stark warnings about the global debt load. The IMF’s first deputy managing director, David Lipton, told CNBC late last year that high debt and low interest rates posed the greatest market risks. On the home front, U.S. National Security Director Dan Coats called America’s $21 trillion debt “a dire threat to our economic and national security.”
Non-U.S. borrowers and emerging markets are also looking at particular risks, according to the IIF report, especially as yields and interest rates rise, making refinancing and repaying dollar-denominated debt significantly more expensive.