Beware of Rising Global Debts

This article first appeared in New Straits Times on January 22, 2019.

KUALA LUMPUR: THE Asian Shadow Financial Regulatory Committee (ASFRC) has warned of the possibility of another financial crisis, given the rising global debt levels.

Its chair Dr Martin Young said the global debt levels currently stood at US$244 trillion, a US$27 trillion increase since 2016.

“Relative to gross domestic product (GDP), the global debt has exceeded 318 per cent. However, the ratio was higher in 2016 at 320 per cent. It was at 290 per cent when the 2008 global financial crisis occurred as a result of the (United States) subprime mortgage crisis,” he said.

Young was speaking at a briefing on “Rising Debt and the Next Financial Crisis”, organised by Jeffrey Cheah Institute on Southeast Asia, here, yesterday. The biggest borrowers are China, with debts at 300 per cent of GDP, Japan (237 per cent of GDP) the United States (125 per cent of GDP) and eurozone countries (around 100 per cent of GDP).

Collectively, they account for more than 67 per cent of the world’s household debts, 75 per cent of global corporate debts and nearly 80 per cent of government debts.

“Since the 2008 global financial crisis, borrowings have increased substantially and this overhang of global debt is starting to be stressed. Unlike a decade ago, when the next economic and financial downturn occurs, the policy tools to reverse it will be less effective.

“As such, the ASFRC is recommending for certain features of Asian financial systems to be improved,” said Young, who is also professor of finance Massey University in New Zealand.

Banks regulators in Asia should look closely at increasing capital adequacy requirements beyond the Basel 3 levels, as being done in Switzerland and New Zealand, he added.

“There should also be initiatives to reduce dependence on the US dollar. Instead, regional financial market integration should be pursued by use of a local currency or a currency basket for the issuance of corporate bonds.”

Another recommendation is for crisis management and resolution procedures within Asia to be delegated to the Asean+3 Macroeonomic Research Office.

ASFRC members consists of independent experts on financial markets and related policy issues in the Asia-Pacific region.

Its members meet twice a year to make policy recommendations by applying academic research findings.

CALL TO DISMANTLE BIG BANKS’ MONOPOLY

THE Asian Shadow Financial Regulatory Committee (ASFRC) called for the dismantling of big banks’ monopoly in Malaysia via issuance of licences for the creation of small and medium-sized banks.

ASFRC member Professor Datuk Woo Wing Thye said this was to ensure the country’s economic sustainability in the event of unanticipated external shocks.

Woo said Malaysia had become too dependent on big banks for its growth over the years.

“The existing banking groups account for a substantial portion of the financial system. If one of them were to fail, it will be too big a shock. We have to end the present monopoly structure of the Malaysian financial system.

“We have seen it in other countries that the impact of bank failures — either by mismanagement, overborrowing or other reasons — is not borne by these banks but by the people. This is not right,” he said at the briefing on “Rising Debt and the Next Financial Crisis” by Jeffrey Cheah Institute on Southeast Asia, here, yesterday.

Woo, who is also president of the Jeffrey Cheah Institute on Southeast Asia and director of Jeffrey Sachs Centre on Sustainable Development, said the government should look into issuing more licences for the creation of smaller banks.

“Licences should be issued to create small and medium-sized banks because even if one of them makes a mistake, it will not have a big shock to the system.

“Furthermore, it has the advantage of providing financing to small and medium enterprises (SMEs).

“After the Asian Financial Crisis, what we did was to assort all the small banks into a number of big bank groups. That’s a mistake, in retrospect, because we know that SMEs have great difficulties in getting financing as the big banks are not interested to lend to small people. This is true all over the world.”

He said the government would need to break the monopoly in the banking system and make room for SME lending.

One of the most recent global financial crises was the subprime mortgage crisis of 2008, which essentially forced the United States and the world into a recession.

One of the world’s largest investment banks, Lehman Brothers, was involved in investing in mortgages. However, the plummeting real estate prices and widespread defaults dragged the bank down.

Despite multiple attempts to stop the financial haemorrhage, which included issuing new stocks, the bank filed for bankruptcy in September 2008.

Lehman Brothers’ bankruptcy finally led to the Emergency Economic Stabilisation Act of 2008, which wasaUS$700 billion (RM2.88 trillion) government bailout funded by American taxpayers to purchase distressed assets, especially mortgage-backed securities, and supply cash directly to the distressed banks.

Source: New Straits Times