Another global debt crisis is likely but would not be as severe as that in the 2008-2009 period despite higher and riskier global debt today than a decade ago, an S&P Global Ratings report said.
Global debt has climbed by approximately 50% since the 2008-2009 global financial crisis, and global debt-to-GDP ratios have surged to greater than 231%, compared with June 2008's 208%. The increased debt is primarily driven by domestic-funded Chinese companies and advanced-economy sovereign borrowing, meaning contagion risk is lower.
The risk is also mitigated by investor confidence in major Western governments' hard currency debt.
The report compared various debt-related metrics with those in the 2008-2009 period to ascertain if we were heading for another financial crisis.
The U.S. debt grew by $10.6 trillion over the past decade, followed by Chinese debt, which jumped $5 trillion.
Some 61% of approximately 12,000 corporates around the world were found to have highly leveraged financial risk profiles, partly due to Chinese firms, which constitute approximately two-fifths of highly leveraged debt. China's corporate indebtedness climbed by two-thirds to 155% of GDP over the last decade, according to the report.
S&P Global Ratings warned that low interest rates have driven investor flows into speculative-grade and nontraditional fixed-income products, which are more volatile and less liquid. In addition, investors are not as protected as they previously were: Approximately 80% of outstanding leveraged loans are "covenant-lite," rising from 15% a decade ago.
The rating agency recently changed its outlook on the risk of a U.S. recession in the next 12 months to 20% to 25% from 15% to 20% in 2018.