The United Nations has expressed concern over the $25 trillion (yes, trillion with a “T”) that companies in emerging countries has amassed. Some economists even believe that this could be the next big “bubble” to pop, and it could spell trouble for the global economy.
The UN Conference on Trade and Development has found that corporate debt in emerging countries has risen from 57 pc of their collective GDP in 2008 to 104 pc. Mind you, these numbers reflect private companies, not governments (which are generally considered more stable).
How big is the potential problem? Let’s put it this way, the assets at the center of the sub-prime mortgage bubble in the United States weighed in at “only” about $2 trillion dollars and nearly wiped out the global economy. Debt in Greece totaled “only” about 360 billion euro and nearly dragged the European Union under.
$25 trillion? It’s a number that can scarcely be understood, at least in relation to past crises.
Where Did This “Bubble” Come From?
How did debt levels get so ridiculously high? A big part of the surge in corporate debt comes down to quantitative easing in the United States, Japan, and European Union. These QE programs resulted in a huge influx in the money supply, which encouraged lending and borrowing.
With interest rates low in most developed countries, and their markets suffering turbulence, many investors and lenders began to look outside established wealthy countries. Economic growth in emerging countries was abnormally high, and their economies seemed like a surer bet. As such, money poured in, and corporate debt has since surged to $25 trillion, with no signs of it abating any time soon.
UNCTAD has noted that many developing countries seemed to falsely believe that they had “decoupled” from the events that caused the Great Recession. Many bankers and financial institutions in developed countries also seemed to buy into this narrative, pouring money into emerging countries. With better yields, and seemingly more stable investments in high-growth markets, corporate bonds and loans in developing countries seemed like the perfect investment.
Should You Be Worried?
The short answer: yes. The long answer? Still yes. Remember, this report on surging debt levels and the warning that a bubble may be forming isn’t being published by some radical contrarian blog. Instead one of the most respected economic watchdogs in the world is raising alarms.
UNCTAD wouldn’t issue warnings if there wasn’t genuine evidence of a major asset bubble. UNCTAD’s report also highlights how the accelerating boom-bust cycle is being fueled by increasingly risky bets being placed by financial institutions around the world. UNCTAD went as far as to call the current situation the “Great Gambling”, certainly not a reassuring moniker for the current times.
So should you be worried? Absolutely, and you need to plan your finances accordingly.