There were three separate panels all dealing with the subject, boasting names like “The Debt Time Bomb” and “When the Corporate Debt Bubble Bursts.” No matter where you come out on the debate, there was no denying this was a hot-button issue all across Davos’ snowy chalets.
And it’s hard to blame the conference’s agenda-setters for scheduling roughly three hours worth of debt discussion. After all, consider what’s going on worldwide right now.
The US is running a near-trillion-dollar deficit. Companies with questionable credit profiles are sitting on mountains of debt they can’t possibly pay off or refinance as interest rates rise. Chinese companies are defaulting at a record pace. And Italy’s ongoing debt crisis is threatening to destabilize the European Union.
But once the Davos panels got going, one thing was immediately clear: The world’s foremost experts on the subject view it as a much more nuanced situation than advertised. Sure, the usual doom-and-gloom factor was present, but there was also a surprising amount of contrarian punditry.
Business Insider was in Davos and able to round up the most poignant commentary delivered across the three debt panels. Our findings are presented below, with each expert’s overall thesis highlighted.
Ray Dalio, the billionaire founder and co-chief investment officer of Bridgewater Associates
Overall take: “We’re in for some short-term pain as debt loads are unwound, but it will positively impact the global economy in the long run.
Specific commentary: “I think we’re in the later stages of the short-term debt cycle, meaning we’re in the 7th or 8th inning of that.”
“The US has a lot of government debt. We have a real problem in terms of the quantity of debt we have to sell to the rest of the world over the next few years. We’ve experienced a lot of stimulation because of tax cuts. If you do pro forma projections, that’s going to be an issue.”
“You’re having a deleveraging in the short term. Whenever you’re having a deleveraging, that’s something that makes the country healthier. It can have a short-term negative effect, and a long term positive.”
David Lipton, first deputy managing director at the International Monetary Fund
Overall take: The so-called debt crisis is perhaps a bit overblown, but there are certainly areas of the global economy where it’s a potentially catastrophic issue.
Specific commentary: “Not all debt is bad. Some people borrow for good reasons and make good use of it. Public sector buying helped provide recovery, and the corporate sector would be in much worse shape if the public sector hadn’t done that. It’s serviceability that really matters.”
“There are good reasons to be concerned. There are pockets of debt held by companies and countries that really don’t have much servicing capacity, and I think that’s going to be a problem.”
“There’s vulnerability to macroeconomic changes. If interest rates were to rise sharply, that would change the debt-servicing situation substantially. A recession would do the same.”
Joshua Friedman, co-founder, co-chairman, and co-CEO of Canyon Partners
Overall take: The current debt situation in the US is an inevitable byproduct of quantitative easing, and the ensuing fallout must be expected.
Specific commentary: “That’s what happens when you artificially set interest rates at a very, very low number. The flipside of that is, when that reverses, you get to see the consequences of owning illiquid assets with illiquid liabilities.”
“Along the way, you do get some of those debt bubble-type characteristics. For example, there becomes incredible competition among institutions like pension funds and endowments that need the yield to survive and buy things. So you get all of that late-cycle, overly bullish behavior that leads to mispricing.”
Dr. Keyu Jin, professor of economics at the London School of Economics
Overall take: China certainly has its fair share of issues, but its debt load is more a symptom of a broken financial system, and is being addressed.
Specific commentary: “The government has ramped up efforts to deleverage the economy. Through a wide range of measures, they were able to stabilize leverage ratios in all sectors. In financial sectors, leverage has come down. In the corporate sector, leverage has stabilized. And household debt is ticking up, but China started at a low level.”
“People focus too much on the level of debt, which is a symptom. But we’re not trying to dig down into the cause. China has a massive misallocation of resources because of the disfunctionalities of the financial system.”
“Today’s challenge is, how do you get credit and resources from the financial sector into the real economy, and into the productive firms, into the highly innovative private sector with latent potential. That’s China’s problem. It’s not necessarily the debt levels and slowing growth rate.”
Mthuli Ncube, minister of Finance and Economic Development in the Zimbabwe cabinet
Overall take: Some African countries have serious debt issues, and they must re-evaluate how they use their money if they hope to fix them.
Specific commentary: “30% of African countries are already in an unsustainable debt position. This has been happening stealthily over the past 10 years. One of the effects of QE was to lower yields on global yields, so African debt became very attractive. Countries have been accumulating debt over time.”
“These resources are being used to finance infrastructure, but there haven’t been enough foreign earnings to service the debt in the first place.”
“Countries will have to start running surpluses. Discipline is the key. They must stop borrowing to support infrastructure. The bulk of the financing should come from domestic sources.”
Eric Cantor, former House majority leader
Overall take: If the global trade war isn’t resolved in timely fashion, debt-related contagion could spread worldwide.
Specific commentary: “You have a collision with this potential debt bomb when you combine it with the trade dispute with China. As we talk about the growing amount of debt, it becomes relevant when the economy stops growing enough, and there’s an inability to sustain that level of debt.”
“If the global economy doesn’t continue to grow, and the issue of the trade dispute isn’t resolved, it can create a contagion that could impact not just China, but all the other countries that derive their activities from this trade relationship.”