Following a rise in global debt to a staggering $250 trillion, nearly three times global GDP, Credit Suisse, the Swiss bank, is remarkably sanguine.
There are risks, for sure, according to chairman Urs Rohner, but he adds: “Outright crisis risks seem fairly moderate. Market pressures impose longer-term discipline to some extent while low real interest rates increase debt sustainability.”
Family offices, in particular, have resisted the temptation to gear up and see no reason to change their ways
Despite a big growth in debt, China’s economic growth should be sufficient for leverage to be kept in check, helped by state controls of lending controls, according to research produced by Credit Suisse for the World Economic Forum at Davos.
Outstanding US corporate debt has hit new highs, but interest rates are low enough to support the burden. Stresses in the market are bad news, but they also reduce loan demand.
Political issues, including the US trade war with China, have postponed the next rise in US rates, probably until June. Credit Suisse wouldn’t rule out a halt.
Other hot spots include emerging markets, led by those who borrow in dollars. But Credit Suisse says fiscal discipline in the sector is better: “The risk of crises and contagion is more limited, not least because the quality of monetary policy has generally improved.”
Property can be a tricky area in recession and some markets are vulnerable. But its report adds: “Financial structures have recently become less risky in private as well as commercial real estate.”
Put that lot together, and you couldn’t come up with a more encouraging backdrop for a loan proposal, if you tried. The US corporate debt market has recovered some of its poise following its recent set back.
Following a difficult fourth quarter, spreads have narrowed and buyers have popped up for new issues, including junk bonds for China’s beleaguered real estate sector.
It never pays to underestimate the size of Asian savings market. And Credit Suisse is among a stream of banks hugely reassured by improvements in their own balance sheets over the last decade, as public sector debts have risen.
All that said, investors have become more reluctant to take out loans: they are more interested in finding ways to boost their income. Family offices, in particular, have resisted the temptation to gear up and see no reason to change their ways. They have seen a series of booms and slumps over the generations, and they have no interest in getting caught out, this time around.
Share prices, remain soggy, following a brief rally this year. According to EY, fourth-quarter profit warnings from UK corporates were rising at the fastest rate since 2011, and share prices are tending to collapse after bad news, never to recover.
Alan Greenspan gained notoriety as chairman of the Federal Reserve before the financial crisis of 2008, as a result of his misguided belief that the banking system could police itself, helped by periodic injections of central bank liquidity. His career record may be flawed, but he has learned a lot.
Talking to CNN, Greenspan, like Rohner, has been sanguine over current levels of debt, reckoning they were no worse than average.
However, bankers were equally sanguine over levels of sub-prime mortgage debt in 2007 at the peak of the credit boom. Two years later, following a house price plunge, investors feared that the entire banking system would collapse when a collapse in property values undermined the security for loans.
Rather than debt, Greenspan says we should worry about asset values: “There are always toxic assets, you just never know which ones are viable. Right now, it’s hard to tell what the toxic asset is.”
The threat to asset values can now come from any number of directions, including excessive debt levels. The most obvious problem relates to political uncertainty fuelled by voters unhappy with their lot in life, as we have seen in the US, UK and France.
As Urs Rohner concedes, political shocks and populist policies, which could lead to: “sudden non-linear increases in risk.” Inflationary money printing and excessive taxation are two of their obvious options, given that the public sector is highly indebted.
Populism can slowly erode state institutions, but undermines economies and asset values far faster. It can lead to nationalism and, in a worse case scenario, war. Technology speeds all this up, via social media, while other applications lead to creative destruction for traditional industries and the growth of cartels run by billionaires, capable of stoking popular envy.
Greenspan argues that stagflation, a combination of economic stagnation and inflation is on the cards, as central banks struggle to contain the next downturn. This, of course, would lead to a stock market slump.
Depressing stuff. We can only hope that Urs Rohner wins the argument, this time around.