A sudden and dramatic pullback in lending by banks in developed countries threatens to stall the global economic recovery, according to a report out today by Hennessee Group LLC in New York.
As developed countries around the world continue to reduce their overall debt-to-equity ratios in a strategy designed to limit risk, the biggest losers are emerging-markets countries that are now seen as key drivers in the world economy, said Charles Gradante, co-founder of the
hedge fund advisory firm.
“Everybody is bullish on emerging markets, and they should be, but you can't have growth without lending,” he said. “There is an assumption that the emerging markets are going to help the G7 nations out of the
recession, but in a worst-case scenario, the developing and emerging markets won't get enough capital to grow.”
Mr. Gradante's fears are based on analysis of debt-to-gross-domestic-product ratios of developed nations that only a year ago were deemed to be carrying dangerous levels of foreign debt.
In January, a Hennessee report sounded the alarm that too many countries had gotten overexposed to foreign debt.
Iceland, for example, which has since seen its economy go into default, had an external debt load of $1.8 billion last year, which was offset by the country's $200 million GDP, creating a debt-to-equity ratio of 900%.
However, the risk now is that external lending by developed nations is moving too rapidly in the other direction, Mr. Gradante said.
Switzerland, which has a GDP of $500 billion, has trimmed its external debt by 23% over the past year to $1.2 trillion and a 240% debt-to-equity ratio.
The United Kingdom remains heavily exposed to foreign debt at $8.7 trillion and a 336% debt-to-equity ratio, but the country has cut its exposure by 28% over the past year.
The United States, which has a debt-to-equity ratio of 94% with a $14.2 trillion economy and $13.4 trillion worth of exposure to foreign debt, has cut its exposure by 3%.
The key, according to Mr. Gradante, is finding a balance of enough lending to support the global economy, but not so much that the lending country is overexposed.
“Right now, I think the U.S. could go up to 200% and not be in trouble, and I think the U.K. could go down to 200% and not be in trouble,” he said. “Getting up to around 300% seems to be in the maxed-out range, but for most countries, the right place to be is far lower than where they were last year.”
