Washington: A record mountain of debt held by governments and companies and widespread weakness in banks, especially in Europe and China, imperil the global economy, the International Monetary Fund said yesterday.
European banks’ weakness looms especially large on the horizon as a threat to the global financial system, with thin margins and a dangerous amount of bad loans, the crisis lender said.
That includes Deutsche Bank, the German giant facing investor jitters and a US legal complaint expected to result in a multi-billion-dollar settlement that could strain its foundations.
IMF’s deputy director for monetary and capital markets Peter Dattels said that Deutsche Bank was among the banks which needed to adapt and “to convince investors that its business model is viable going forward and that it has addressed the risks” of litigation.
But a record level of sovereign and corporate debt will make it even harder for banks to clean up their balance sheets and support economic growth, the IMF said in a review of global financial and fiscal risks.
“Global debt is at record highs and rising,” the IMF’s Fiscal Affairs Department chief Vitor Gaspar said. “High debt levels are costly as they often end up in financial recessions that are deeper and longer than normal recessions,” he said.
“Moreover, excessive private debt is a major headwind against the global recovery and a risk to financial stability.”
The IMF said there was widespread weakness in banks, retirement funds and insurance companies, the result of years of slow economic growth and ultra-low interest rates, which have paired their profit margins to the bone.
Governments need to boost growth and help clean up the finance sector without overly tacking on more debt of their own, it said.
But even then, in advanced economies, 25 per cent of banks, holding $11.7 trillion in assets, would remain weak even in a cyclical economic recovery. The solvency of many life insurance companies and pension funds is threatened by the prolonged period of low interest rates.