The World Bank has warned of the risk of a fresh global debt crisis, urging governments and central banks to recognize that historically low interest rates may not be enough to offset another widespread financial meltdown.
In its biannual Global Economic Prospects (GEP) report, published late Wednesday, the Washington D.C.-based group said there have been four waves of debt accumulation over the last 50 years.
The current wave — which started in 2010 — is thought to be “the largest, fastest and most broad-based increase” in global borrowing since the 1970s.
The World Bank said that while low levels of interest rates — which financial markets expect to be sustained over the medium term — “mitigate some of the risks associated with high debt levels,” the previous three waves of broad-based debt accumulation all ended with financial crises in many developing and emerging economies.
“Low global interest rates provide only a precarious protection against financial crises,” Ayhan Kose, director of the World Bank’s Prospects Group, said in the report.
“The history of past waves of debt accumulation shows that these waves tend to have unhappy endings. In a fragile global environment, policy improvements are critical to minimize the risks associated with the current debt wave.”
In 2018, global debt climbed to a record high of about 230% of gross domestic product (GDP), the World Bank said. While total debt from emerging and developing economies reached an all-time high of almost 170% of GDP. That marked an increase of 54 percentage points of GDP since 2010.
The so-called “fourth wave” of global debt was found to bear many similarities to the previous three: a changing global financial landscape, mounting vulnerabilities and concerns about inefficient use of borrowed funds. The first three waves of global debt accumulation were identified as running from 1970-1989, 1990-2001 and 2002-2009.
Trader Georgi Bozhidarov