Global debt and dollar risks

Statistics recently published by the Washington-based Institute of International Finance indicate that global debt had reached $247.2 trillion by the end of march, up 11.1 percent from a year earlier.

The continuous global debt accumulation has been largely caused by the easy financing environment over the past years, in which the long-term low interest rate policies of many countries have greatly expanded their domestic credit and lowered their corporate borrowing costs. At the same time, stimulative fiscal policy has encouraged governments and enterprises to increase debt. As a result, cheap capital has flooded the markets across the world and the leverage level of all sectors has increased.

Ever-soaring debts have seriously restricted the space for fiscal policy adjustments. Experience shows that economies with high public debts and large fiscal deficits usually have a longer period of recession, because any time when they need fiscal support to fend off a downturn, the excessive public debt always restricts policy implementation. Excessive debts are also an important cause of a financial crisis. A heavy debt burden is usually considered an important indicator of financial fragility. For countries with relatively open capital accounts, domestic financial fragility could quickly evolve into a financial market risk, triggering capital outflows and putting pressure on their currencies.