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November 2015

$3 trillion excess debt

By Tarun Kumar G. Singhal, Raman Jokhakar Chartered Accountants
Reading Time 1 mins
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The IMF debt estimate can become a ticking bomb given the downturn in economic growth combined with the prospect of higher interest rates in US

Companies from emerging markets have been on a borrowing spree in recent years. Now the International Monetary Fund (IMF) has estimated that these companies have over-borrowed around $3 trillion, which can become a ticking bomb given the downturn in economic growth combined with the prospect of higher interest rates in the US. It is not usual for a top official at the multilateral lender to speak about the prospect of a “a vicious cycle of fire sales and volatility”.

Such chaos is definitely not inevitable, but the next year could yet see massive swings in asset prices—in case the most dire possibility becomes a reality. A sharp increase in risk premiums could push many over-leveraged companies from emerging markets over the edge. Indian policymakers will also have to figure out a way to manage the triad of risks that IMF has talked about in its new Global Financial Stability Report.

The upshot: there could be trouble round the corner. (Source: Quick Edit in Mint dated 09-10-2015.)

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