The Debt Dilemma

LONDON/WASHINGTON, DC – Greece’s divisive negotiations with the EU have placed debt back at the center of debates about economic growth and stability. But Greece is not the only country struggling to repay its existing debt, much less dampen borrowing. Its fraught negotiations with its creditors should spur other countries to take action to address their own debt overhangs.

Since the global financial crisis erupted in 2008, the world’s debt has risen by $57 trillion, exceeding GDP growth. Government debt has increased by $25 trillion, with the advanced economies accounting for $19 trillion – a direct result of severe recession, fiscal-stimulus programs, and bank bailouts. While American households have reduced their debt considerably (mainly through mortgage defaults), household debt in many other countries has continued to grow rapidly. In all major economies, the debt-to-GDP ratio (including both public and private debt) is higher today than it was in 2007.

Much of this debt accumulation was driven by efforts to support economic growth in the face of deflationary headwinds after the 2008 crisis. That was especially so in China, which, together with other developing economies, accounts for nearly half of the debt incurred since 2008.

To be sure, debt itself is not bad. But excessive reliance on debt creates the risk of financial crises, which undermine growth. Given this, the world needs to find both less credit-intensive routes to growth and ways to eliminate existing debt burdens.