United Nations Warns of Potential $25 Trillion Dollar Debt Bubble, World Media Largely Ignores Report

UNCTAD has released an alarming report warning of potential $25 trillion dollar corporate debt bubble forming in developing countries, but so far the world media has largely ignored the report.

The United Nations Conference on Trade and Development (UNCTAD) released a report this week that criticized governments' management of the global financial system, outlined a “Great Gambling” and the propensity towards increasingly risky bets in the global financial system, and warning of a potential $25 trillion (yes, with a “T”) dollar asset bubble. Briefing through the Wall Street Journal and other major financial news websites, however, you'll barely find a mention.

UNCTAD digs even further, noting that inequality is continuing to grow, and that financial markets remain unreformed. According to UNCTAD, politicians have allowed “business as usual” to continue unabated, even as the flaws in the way the financial system is managed have only become more obvious.

Mind you, we're not talking about some out of the way contrarian blog prophesying doom, we're talking about a respected branch of the United Nations. The wide-sweeping report is raising several alarm bells, the most immediately concerning of which is arguably the $25 trillion dollar debt bubble in developing nations.

To put that into perspective, the assets at the center of the 2008 sub-prime mortgage crisis totaled only about $2 trillion dollars, while the Greek debt crisis that dragged the EU down totaled only about 360 billion euro.

Developing Countries Increasing Integrated Into Unpredictable Global Financial Market

Over the past few decades, developing countries have begun to open their financial markets to foreign investments. With globalization progressing at a rapid clip, the opening of financial markets is lock-step with the increasing integration of global markets in general. The result in many countries has been an influx of foreign capital, which fueled the economic expansion observed in many countries over the past decade.

The Bank for International Settlements, an international financial institution owned by central banks, has found that non-financial institution corporate debt has surged since 2008. In 2008, corporate debt came in at only $9 trillion dollars, roughly 57% of the combined GDP of such developing nations. By the end of 2015, however, corporate debt had reached $25 trillion dollars. Even in spite of rapid economic growth, these debt levels have reached 104% of GDP.

With the United States, EU, and Japan all having engaged in aggressive quantitative easing programs over the past few years, interest rates have been low, currencies weak, and liquidity high. QE, among other factors, propelled the massive lending spree, and may have created a serious market distortion.

So long as developing economies continue to enjoy strong growth, this debt may be sustainable. However, economic growth in most developing countries has slowed sharply over the past few years. With most major economies outside of the United States struggling, it's hard to pinpoint what the next “engine of growth” will be.
Corporate debt in China has surged to 170%, economic growth has slowed, and fears of a potential property bubble are still simmering. Add in extensive government action to generate false demand, thus creating market distortions, the shadow banking sector, and numerous other challenges, and China, once the strongest economy in the world, looks sickly and risky at best.

Europe continues to struggle with chronic high unemployment and poor public finances. The unemployment situation is better in Japan, but economic growth remains elusive. Brazil's economy has fallen into recession, Russia is suffering from a serious financial crisis. Once roaring Asian tiger economies, such as Malaysia and Thailand, are facing their own challenges.

Add in a strengthening dollar, which will make it harder for companies to repay dollar denominated debts, and the risks are plain to see.

There's now a legitimate risk that the music will stop, and that large portions of that $25 trillion dollar corporate debt will turn sour. Given how integrated the global economy is, a global financial crisis could quickly erupt.

Mind you, this isn't me speaking, it's UNCTAD.

False Sense of Security Fueling “Great Gambling”

While developed nations have struggled with slow growth in the post Great Recession period, many developing countries were able to maintain strong economic growth. This has led to a view among many that developing nations had essentially decoupled from developed countries.

At first glance, the slowdown in demand from developed nations should have resulted in a slowdown in developing countries as supply for cheap manufactured goods and natural resources dropped. Instead, developing countries were able to secure strong economic growth and maintain low unemployment rates.

I contend that the supposed decoupling never even occurred. Just the opposite, as fully developed countries stagnated, the need to cut costs, which can be accomplished through outsourcing (among other means), may have actually spurred foreign investment in developing countries. With demand constrained in developed countries, cutting costs to preserve profits became essential.

Lacking regulation and foresight, companies and investors have poured huge amounts of money into developing economies. Now, it's possible that a bubble has or is forming. And if this $25 trillion dollar bubble were to pop, it could quickly overwhelm the global financial system.