World of Debt, 2014 edition

The IMF’s Global Financial Stability Report is out today. These days it makes for slightly less exciting reading than in previous years, which is hardly a surprise given how much financial markets have calmed down since then. However, it nonetheless contains some pretty disturbing evidence of how investors are becoming dangerously dependent on low interest rate – and how their appetite for risky high-debt instruments has risen back to pre-crisis levels. In fact, in some senses, the appetite is even greater than before the crisis.

Consider the chart above – specifically the green line. It shows that the issuance of covenant-lite loans – debt which doesn’t contain the normal protections and clauses found in most debt.  It’s a sign of how much investors’ appetite for yield is once again influencing their behaviour.

A second table worth considering is this table showing you how each different major economy compares in terms of various different financial stability metrics – everything from banking system debt to current account deficits.

Anything in red denotes dangerous levels. As you can see, the UK’s dashboard is flashing red for gross household financial liabilities, for banks’ gross debt, for the country’s external liabilities (a product, in part, of having a large financial sector) and the current account balance, which is worse than for any of the other selected countries.