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Surge in risky corporate debt raises spectre of financial crisis 

Global debts are at a new record high of $237 trillion (?192 trillion) - but a surge in economic growth means the risks may have gone unnoticed.
This is a rise of $21 trillion compared with 2016, the Institute of International Finance said, with debts rising particularly sharply in China, Argentina, Nigeria and Turkey.
Households in Europe are also borrowing enthusiastically.
The global debt-to-GDP ratio has dipped 318pc, due to strong economic growth. But if this growth spurt subsides, the debt burden could bring serious risks for the world economy.
Surge in risky corporate debt raises spectre of financial crisis 

Debts are rising, though strong GDP growth has masked the scale of the increase, the IIF has warned

Credit:
IIF
“With global financing conditions still relatively benign, the risks of such a rapid increase in the debt burden remain largely under the radar,” the IIF said.
At the same time the International Monetary Fund fears that corporate debts are booming, and it is worried that much of the extra lending might be going to businesses at the riskier end of the spectrum.
It has analysed lending behaviour in the run-up to financial crises and fears that this type of lending could lead to another crash - warning regulators around the world to be extra vigilant.
“A period of high credit growth is more likely to be followed by a severe downturn or financial sector stress over the medium term if it is accompanied by an increase in the riskiness of credit allocation,” the IMF said in its Global Financial Stability Report.
“Thus, while policymakers should be alert to periods of rapid credit expansion or increasing riskiness of credit allocation, they should pay special attention when they take place together.”
Surge in risky corporate debt raises spectre of financial crisis 

Financial conditions are as loose today as they were in the build-up to the financial crisis

Credit:
IMF
To combat these risks, it is important that banking regulators can “better exert control over lending and origination standards during good times, when risks appear contained”, rather than merely responding after a crash.
Banks should build up capital buffers to protect themselves against loans turning bad, the IMF said, and politicians should consider the risks of directing large amounts of credit into specific firms or sectors.
Strong corporate governance should also be encouraged so that business managers do not take excessive risks.
As credit surges now, it is vital regulators monitor the risks closely, the IMF said: “As financial conditions loosened further in 2017, the riskiness of credit allocation might have continued to rise, which warrants close monitoring and heightened vigilance.”
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