Eight years after the financial crisis, the world is suffering from a debt hangover of unprecedented proportions.
Gross debt in the non-financial sector has more than doubled in nominal terms since the turn of the century, reaching $152 trillion last year, and it’s still rising, the International Monetary Fund said. The figure includes debt held by governments, non-financial firms and households.
Current debt levels now sit at a record 225 percent of world gross domestic product, the IMF said Wednesday in its semi-annual Fiscal Monitor, noting that about two-thirds of the liabilities reside in the private sector. The rest of it is public debt, which has increased to 85 percent of GDP last year from below 70 percent.
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Slow global growth is making it difficult to pay off the obligations, “setting the stage for a vicious feedback loop in which lower growth hampers deleveraging and the debt overhang exacerbates the slowdown,” said the Washington-based fund.
“Excessive private debt is a major headwind against the global recovery and a risk to financial stability,” IMF fiscal chief Vitor Gaspar said in prepared remarks. “History has taught us that it is very easy to underestimate the risks associated with private debt during the upswing.”
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The massive debt load complicates the task for global policy makers, who have been urged to use fiscal policy to boost growth amid the waning ability of central banks to stimulate the economy. Finance chiefs and central bankers from the IMF’s 189 member nations meet this week in Washington for the annual meeting of the fund, which was conceived during the Second World War to oversee the world monetary system.
Much of the borrowing dates back to the boom in private debt that preceded the 2008 financial crisis, according to the IMF. While households and companies in advanced economies started to retrench following the crisis, the deleveraging has been uneven and in some instances debts kept rising, Gaspar said. Bad debts have ended up on government balance sheets.
Meanwhile, low interest rates drove a surge in corporate debt in emerging markets. Levels of private debt are now high in both advanced nations and a few large emerging markets such as China and Brazil that are considered systemically important to the global financial system.
There’s no consensus on what levels of debt-to-GDP should be the considered alarming, the IMF said. However, financial crises tend to be associated with excessive private debt in both advanced and emerging economies, the fund said. In addition, research has shown that high debt is linked with lower growth, even when a crisis is avoided.
If companies postpone paying off debt, they could become “very sensitive to shocks, increasing the risk of an abrupt deleveraging process,” the IMF said.
Depressed economies with weak banking systems should avoid premature tightening of fiscal policy, the fund said. Governments could speed “voluntary” restructuring of private debt through measures such as subsidizing creditors to lengthen maturities.
The IMF flagged the euro area and China as economies where it’s particularly important for deleveraging to occur.