Newly-weds take a vow to be together till death parts them. The vow, tying citizens to their governments and banks, however, is at risk of unknotting because debt will leave them apart.

Since the 2008 financial crisis triggered by the collapse of highly-leveraged institutions, such as Lehman Brothers, Bear Stearns and Merrill Lynch, global debt levels have risen by a whopping $57 trillion! Global debt is now some $225 trillion, which is 2.8 times global GDP.

In the decade to 2014, global GDP has grown at a CAGR of 5.4 per cent but debt has grown at 9 per cent. Atop the $225 trillion in debt are another $325 trillion of derivative products on that debt! This debt is thanks to the easy money policy of the US Federal Reserve, and other central banks of Europe, China and Japan, who have expanded their balance sheets in order to pump money into their economies.

Here is the interesting part.

Before they collapsed in 2008, Merrill, Bear Stearns and Lehman had debt to equity ratios of 40, 35 and 31 times, respectively. The US Federal Reserve is now leveraged 77 times!

Printing money

So, what is the difference between Lehman and the US Fed? Just as Shashi Kapoor said in Dewar ‘merey paas maa hai (I have mother with me)’ the US Fed has a printing press! So, it can print all the money it wants, leveraging its balance sheet, and the only risk is that of hyper inflation.

With too much debt, central bankers are loath to hike interest rates as their debt servicing costs would go up. When the debt bubble bursts, too-big-to-fail banks will be in trouble (there are signs already) and will be bailed in, not bailed out, this time. But the over-stretched Central banks may not bail them out. So they will be bailed in, by their depositors. In fact, the Bank of International Settlements’ rules demand that at least 12 per cent of bank funds are those that can be bailed in!

Given high borrowings, central banks are reluctant to raise rates. The Bank of Japan kept its policy rates unchanged last week. It is a moot point if Janet Yellen would be bolder; US Fed may keep its interest rate unchanged, providing a new round of drinks to an addicted Wall Street. This is why US stock indices are near their highs.

Lower commodity, including crude oil, prices, are helping companies to bolster earnings.

It was earlier reported that shale oil/gas producers need a price of at least $60 to break even. However, even though the price is now in the 40s, shale oil/gas production is rising. This is thanks to companies developing new approaches to drilling and other improvements to reduce wellhead costs.

The low crude oil prices are helping India, which imports 75 per cent of its requirement. Despite this corporate earnings growth of India Inc is low. According to Kotak Institutional Equities, earnings growth for FY16 is expected to be 6.5 per cent — far less than the 18 per cent expected at the start of the year.

Last week the Sensex gained 258 points to close at 25,868.

The India story looks far better than the story of other countries, and some sensible steps are being taken on the continuum of economic reforms. Investors need to watch out for the debt bubble. This is the main concern.

The author is India Head, EuroMoney Conferences

comment COMMENT NOW