The world has become a complex web of global imports and exports, creating a financial system that safeguards the transaction of companies all around the globe. However, there is a multitrillion-dollar problem of crushing global debt that both people and companies around the world have been struggling to eliminate. The financial crisis of 2008 put the wheels of bad debt on a fast-tract to destroy the economies of several nations, yet the latest bad debt developments come from the overhang of bad loans.
A Source of Worry
One of the key areas of concern lies with China. There are analysts that estimate over $5 trillion in troubled credit ventures. Though this number is nowhere where the United States stands on a debt total, this number is equal to half of the country’s yearly economic output. The Chinese banks began to pull the reigns on lending practices, but this can only weaken their economy even further. China has long held the place of the second-largest economy in the world after the United States, and with the impact of COVID-19 still far from being fully actualized, the economy could continue to slow down. This would cripple the dozens of other countries that been relying on a robust Chinese economy for their own growth.
It isn’t just the banks in China that have economists and finance experts worried. The aggressive stimulus policies from central banks and governments across seem to result in debt hangover. After the recession in 2008, it took months for energy companies to pay off the easy money they borrowed to invest in the shale boom, just as it took months for mortgage default numbers to fall. The analysts are estimating that the number of bad loan funds in Europe top more the one trillion dollars, with many of the European banks still bearing the brunt of defaulted loans. These overhanging debts are making it hard for policymakers to breathe life into the European economy. Italy has had to face deep loan troubles, and the world watched the financial unraveling of Greece. Across the pond, the bad loans are impacting countries in South America. Brazil has been dealing with ripple effects of a credit binge, with the nation’s biggest banks struggling to deal with bad loans. From the Royal Bank of Scotland to the Guyana Bank for Trade and Industry Limited financial institutions are having to act quickly and recognize the losses that are embedded in bad loans. With economies slowing down in response to preventive measures and guidelines issued by governing bodies, many borrowers are going to have a harder time trying to pay down their debt. Banks, struggling to contain their own financial pain, will have to deal with these losses by raising new capital. The tendency will be to start lending again and fuel economic recovery, but this isn’t always a palatable option.
The Bailouts for Borrowers
When a bank recognizes the amount of loss on a bad loan, the natural tendency is to send the borrower (both corporate and household) into a foreclosure process. As this happens, citizens around the nation start to panic, clamoring for government help and relief. Resolution is sometimes offered through taxpayer bailouts, but these come at a steep social price. The fear and frustration from the whole situation can make it harder for banks to attract new borrowers or raise fresh capital. However, unless these bailouts occur, the banks remain weak and hesitant to willingly extend new loans or lines of credit. This only prolongs the hope of economic recovery. Many analysts cite the reluctance of Japan back in the 1980s to recognize the losses they experience after the country’s credit boom, and it took years before the economy fully recovered. Because of this example, there is an increasing number of banking experts that continue to worry and research the effects of China’s bad loans on the global economy.
The Drag on the Global Economy
If China experiences a slow economy, the rest of the world will see global growth get stunted. The number one concern is the banking industry and how the absence of payment-in-full accounts for the loans and credit products for the $30 trillion in the financial sector’s loan and financial assets will impact trade and asset prices around the world. Credit problems that unravel in China will directly or indirectly impact almost every sector of global trade and operations. The bad loan estimates are just estimates, though experts seem to agree that a $5 trillion figure is conservative. The world is waiting with bated breath to see how China will successfully deal with its rising number of bad debts.
There is no perfect solution to the global crisis of bad debt, apart from each financial institution taking responsibility for the accumulation, acceptance, and the initiation of bad debt accounts. Acting early and reducing losses when first apparent is a smart approach for helping reduce the global debt total.