Via Financial Times

Developing countries racked up a “towering” $55tn of debt by the end of last year, in a borrowing surge since the financial crisis that has been the fastest and widest in modern history, according to World Bank research.

Fuelled by the era of very low interest rates, total debt has rocketed to 170 per cent of emerging markets’ gross domestic product, a 54 percentage point increase since 2010, according to a World Bank report published on Thursday.

The findings are likely to fan concerns that developing countries have accumulated debt levels that could quickly become unsustainable should global rates rise.

“The size, speed and breadth of the latest debt wave should concern us all,” said David Malpass, World Bank group president.

The bank warned that, on many measures, emerging economies were more vulnerable today than before the global financial crisis. Three-quarters have budget deficits, while corporate debt denominated in foreign currencies is much higher and current account deficits are four times larger than in 2007.

Borrowers in the emerging world should try to mitigate these risks through greater transparency, which would help identify dangers, and pursue alternatives to borrowing by encouraging private sector investment and expanding their tax base, the bank said.

“Towering though it may seem, the latest global wave of debt can be managed. Across the world, interest rates are at historic lows, moderating the costs of the debt,” said Mr Malpass.

“But leaders need to recognise the danger and move countries into safer territory in terms of the quality and quantity of investment and debt — sooner rather than later.”

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The bank’s “Global Waves of Debt” report compares the recent borrowing frenzy with three previous episodes of rapid EM debt accumulation, all of which ended in financial crises.

Compared with the preludes to the Latin American debt crisis of the 1980s, the Asia financial crisis of the late 1990s and the global financial crisis of 2008 — when EM exposure was contained to specific regions and largely involved public debt — the researchers found the current build-up involves public and private borrowers, is not limited to one or two areas and involves new kinds of creditors, often originating from China.

China itself, whose debt-to-GDP ratio has risen 72 points to 255 per cent since 2010, accounts for the bulk of the boom, but nominal debt levels have doubled in the rest of the developing world, the bank found.

For now, historically low interest rates make a crisis less likely, according to the report, but the authors said that roughly half of the 521 national episodes of rapid debt growth since 1970 have resulted in crises which significantly hurt incomes.