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Debt build up amid low interest rates
Sep 18, 2015

Fed held to status quo. Amid speculation and volatility, equity markets around the world heaved a sigh of relief after the decision to raise interest rates by the US Federal Reserve was deferred. On the surface, the fears may seem valid. The last time Fed raised interest rates were in 2006. And since then, foreign money has found way to emerging markets in search for higher returns. The end of the era of low interest rates can pull out hot money impacting stocks and currencies around the world. But this concern cannot mask a much deeper malaise ushered in by the cheap money regime. And the malaise that we are talking about is the mountain load of debt that has piled up in developed economies due to long periods of easy monetary policy post the financial crisis. This is highlighted in the Annual Report by the Bank for International Settlements. Since 2007, the indebtedness of the non-financial sector of advanced economies has shot up by 36% to 265% of the gross domestic product (GDP) in 2014. And the increase has been fuelled by the steep rise in government debt.

Emerging markets are relatively better placed with debt of the non-financial sector standing at 167% of GDP in 2014. But this is still higher by 50% as compared to the level seen in 2007. Amongst emerging economies, China has a huge debt to GDP ratio of 235%. However, India with its conservative monetary policies has managed to maintain a comparatively low debt to GDP ratio of 125% during this period.

But the bottomline is that the world has become more indebted than before. Unless major central banks refrain from short term measures of keeping interest rates artificially low to boost growth, the world may be find itself getting trapped in a vicious cycle of ballooning debt.

Data Source:Bank for International Settlements, Livemint

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