Debt trouble comes in threes

Luncheon speech by Mr Jaime Caruana, General Manager of the BIS, on the occasion of the International Finance Forum 2014 Annual Global Conference, Beijing, 1 November 2014.

Debt as a share of GDP has risen by 20 percentage points globally since the global financial crisis, driven primarily by the expansion of public sector debt in the advanced economies and the rapid rise in private sector debt in the emerging market economies. Debt can in principle serve many essential economic functions, but in practice it is often not put to the most productive use - or is even used in potentially destabilising ways.

The debt problem usually does not come alone. Most obviously, the build-up of leverage can increase the vulnerability of the financial sector, induce adverse market dynamics and result in growth-impeding debt overhangs. Less obviously, but no less importantly, credit booms tend to be associated with overinvestment in certain sectors, ie a misallocation of resources in the real economy. And last but not least, the feel-good effect of credit booms can mask the distortions and weaknesses that are already in place, resulting in their not being detected and addressed in a timely manner.

The global economy needs to move away from the debt-driven growth model of the last few decades in order to truly recover from the crisis. This requires not only efforts to restore the resilience and reliability of the financial sector, but also a rebalancing of economic policies to support greater flexibility and productivity in the real economy.