Catching Up with the Forbidden Fruit, Credit Growth

June 27, 2012

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Central banks love to boost growth with debt-induced sugar highs, only to see much of this debt go bad. Unfortunately, they do not associate the two.

Research from the BIS, NBER, and many other studies associate rapid growth in credit with subsequent crises; however, of equal importance, it simply makes sense. Flood the world with an amount of cheap credit that is far above the rate of income growth, and eventually, you’re going to have problems.

Eighteen months ago, in “Where’s the Next Crises in Emerging Markets? Let’s look at the Number One indicator–Credit Growth,” I pointed to supporting research, while showing burgeoning credit bubbles in Turkey, India, China, Indonesia, and Brazil. 

The BIS cited similar studies and figures in its annual report:

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  • Credit growth 6% above its long-term trend in relation to economic growth has often presaged serious financial distress~BIS
  • Debt service costs for households and firms in Brazil, China, India and Turkey are at its highest level since the late 1990s (% GDP) ~ BIS
  • Thailand and Turkey have credit gaps of 15 percent or more, while Brazil and Indonesia are also in the danger zone above 6 percent
  • In Brazil, China, India and Turkey, the fraction of private sector GDP that goes to debt service is at levels hit during the late 90s (which led to the Asian Flu)
  • Two of 28 emerging and advanced economies can expect their trading partners to grow more rapidly in 2011–15 than in 2003–07 – growing…apart

Turkey At Risk of Major Crises, Highlights Global Growth Problems

Growth in Trade Credit and Debt Guarantees Contributed to 1931 Sterling Crisis

Credit Figures Provide Early Warning for Financial Crises

Fitch Examines Global Credit Growth Figures

Barry Eichengreen on Credit Bubbles

INVESTORS WAKING UP TO EMERGING MARKET RISKS

INDIAN AND BRAZILIAN YIELD CURVES INVERT, HINT AT “MONSTROUS RISKS”

 

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