Eight years might have passed since the subprime mortgages shook economies, but the after-effects of the debt crisis still loom large. Global debt has increased by $57 trillion since 2007, an annual increase of 5.3 per cent.

None of the leading economies has managed to reduce debt to GDP ratio; 14 countries including France, Singapore and China, have seen their ratios rise by more than 55 per cent. Fuelled by real estate and shadow banking, China’s total debt has quadrupled, rising from $7 trillion in 2007 to $28 trillion by mid-2014. At 282 per cent of GDP, China’s debt as a share of GDP is larger than that of the US or Germany.

Real economy hurt In a world of asset price inflation, it is more profitable to buy an existing asset than to start a new enterprise, which means the same asset is turned over repeatedly. Thus, an important side effect of inflated asset prices may well be a diminution in new business formation, which in turn, will retard job creation and future growth. The problem is, lot of debt is secured against property and when prices fall, both creditors and debtors lose out. Another problem in high debt level is the need to refinance regularly.

Ten countries have debt ratios of more than 300 per cent of GDP; if the average maturity of debt is 5 years, 60 per cent of GDP must be refinanced every year!

If creditors lose confidence in debtors’ ability or willingness to repay, crisis can occur very quickly as in the case of Greece. When the similar crisis took place in 1990s some of the countries like Sweden and Finland were able to use currency depreciation to boost their exports, when the global economy was strong. Today’s economic problems are widespread and not all currencies can be depreciated at once.

The key to dealing with debt is to spur growth, even as debt ironically acts as an impediment to the growth process. The world is trying various ways to break out of high debt.

Competitive depreciation “Abenomics” has clearly made a difference in the value of the Yen. Bank of Japan’s massive programme of quantitative easing which involves creating new Yen to buy assets to the extent of 644 billion per annum has significantly helped Yen to depreciate by more than 30 per cent in the past two years to remain competitive. At the same time, weaker Yen has created two challenges for the rest of the world; it has made Japanese exporters very competitive and weakened the position of rival exporting nations especially at an inconvenient time, when the global demand is slowing. It is not possible for all countries to keep devaluing the currency to remain competitive!

The increased willingness of both the Bank and Japan and European Central Bank to pursue QE indicates continued concern over weak demand and deflation, which is also hurting exports.

The reduction in global demand has caused exports to fall in the rest of the Asian countries, including India. We cannot afford to ignore the fact that more than 17 per cent of our GDP is from exports.

Our situation Our banking (public sector) situation is under stress. The asset quality has seen sustained pressure due to continued slowdown in the past few years. If we add the stressed advances portfolio to the NPA numbers the stressed assets ratio for public sector banks is a staggering 18.37 per cent, as per the Global Financial Stability report released by IMF recently. Earlier, banks were allowed to advance up to 40 per cent of their capital to a single business house; projects could be executed with up to 80 per cent debt, the borrowers bringing in only 20 per cent equity, sometimes even less.

The pressure may lessen only if the asset quality improves on account of higher growth. While the Government has taken several positive steps in the recent past to remove the impediments in the growth of infrastructure, there are still several challenges. Efficient pricing of critical resources whether it is the power, toll tax on road are required to be speedily implemented.

New investments will continue to be dictated by the Government’s reform policies in banking and power, among others. Till then, we hope that the multiplier effects from Government expenditure in roads, railways and other sectors feed into growth.

Debt remains an essential tool for funding economic growth. But how debt is created, used, monitored, and when needed discharged, also determines growth.

The writer is president & Group CFO, TAFE. The views are personal

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