According to the Switzerland-based Bank for International Settlements, aggregate global debt has ballooned more than 40 percent since the financial crisis and is estimated to have reached $100 trillion.
Global debt expanded as governments borrowed to boost their economies out of recession and companies took advantage of record-low interest rates to issue debt. In the United States, government debt outstanding has surged to a record $12 trillion, up from $4.7 trillion in 2007.
As debt levels rose, interest rates have declined as central banks implemented policies to suppress rate levels to boost growth. The surprise is that all this debt has not diminished investors’ appetite for global fixed income investments.
Take the remarkable change in investor psychology toward Greece. At the peak of the crisis, investors were demanding 30-percent yields on 10-year Greek bonds. In recent days, the Greek government easily raised $4 billion in bond financing for five-year bonds yielding 4.95 percent. The bond offering was oversubscribed fivefold—in other words, the bonds were in high demand as investors entered buy orders totaling $20 billion.
Global fixed-income strategist Mohamed El-Arian cites three reasons Greece was able to pull this off: a determined effort to get its domestic financial house in order, persistent financial support from the European Central Bank, and investors’ hunger for yield in an era of low rates.
Not long ago, it was feared that a Grecian default could tear apart the European Union and even spell the end of the euro. Greece has instead received two bailouts totaling $332 billion since 2010 from the so-called “troika lenders”—the European Commission, the European Central Bank and the International Monetary Fund. And the euro, which fell to as low as $1.1877 in 2010, has stunned many observers by strengthening to $1.3933 recently.
Overall, it appears European economic pressures are waning. Across the troubled euro region countries of Greece, Ireland, Italy, Portugal and Spain, the yield-to-maturity on their bonds has fallen to an average of 2.44 percent, the lowest in history for these nations. That’s down dramatically from yields of more than 9.5 percent in 2011, when pessimism toward their troubled economies peaked.
In Greece, statistics show the economy may have finally hit bottom. The country is moving forward with an airport expansion on the island of Crete and a highway and high-speed rail network for 2017.
While there are signs of green shoots, Greece is not out of the woods by any means as it taps into its second bailout program. The country is set to receive a payment of $11.4 billion in the next step of aid. The funds are needed to avoid default in May when Greece is due to pay $17.2 billion of government debt. GDP is set to grow at 0.6 percent this year, although austerity measures imposed by the bailout lenders have contributed to a stubborn 28-percent unemployment level. Greece’s bailout debt will take decades to repay—a scenario that confronts other European countries scarred by the crisis.
A few sage observers of historical financial crises cautioned that a global debt overhand would lead to several years of muted global growth and persistent low interest rates. Their warning is looking prescient.•
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Skarbeck is managing partner of Indianapolis-based Aldebaran Capital LLC, a money-management firm. His column appears every other week. Views expressed are his own. He can be reached at 818-7827 or ken@aldebarancapital.com.
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