Global debt has surpassed $152trn (£120trn) for the first time ever, according to the International Monetary Fund.
The IMF warns that the debt mountain is dragging on economic growth and could lead to the economic recovery after the financial crises turning back in to a recession.
Two thirds of the debt lies in the private sector, which the IMF said could carry “great risks” when the liabilities become excessive.
In its Fiscal Monitor study for 2016, released yesterday, the IMF says: “The sheer size of debt could set the stage for an unprecedented private deleveraging process that could thwart the fragile economic recovery.”
The IMF called for government intervention in private financial institutions such as banks and asset managers to help wind down private debt burdens.
The IMF says: “The path toward strong growth in those countries mired in a debt overhang may require decisive and prompt action to repair the balance sheets of banks – a clear priority in some European countries.”
It adds: “Generally, where the financial system is under severe stress, resolving the underlying problem quickly is critical. When the problems in the non-financial sector have not yet migrated to the banking sector, well-designed and well-targeted fiscal interventions in the form of government-sponsored programs to restructure private debt—which can include measures such as subsidies for creditors to lengthen maturities, guarantees, direct lending, and asset management companies—can create incentives for the cleanup to take place.”
In a separate report on global financial stability, the IMF warned that low interest rates and low growth had led to the rise of populist politics and policy uncertainty.
However, it noted that financial markets already anticipate negative interest rates in the EU and Japan to remain until at least 2020.
IMF deputy director for monetary and capital markets Peter Dattels says: “Medium-term risks…are building because we are entering a new era, characterised by chronic weak growth, prolonged low interest rates, and growing political and policy uncertainty. This could undermine the health of financial institutions and add to the forces of economic and financial stagnation.”