Debt defaults among businesses and countries are rising, and these could cascade through the financial system and possibly trigger another financial crisis, the former head of the Bank of England said Monday.
In a talk delivered to the American Economics Association’s annual meeting, Mervyn King, who was governor of the Bank of England during the last financial crisis, said significant debt restructuring may be a necessary precondition for restoring the global economy to health.
But this restructuring implies “writing down asset values on the balance sheet of many financial intermediaries to more realistic levels,” King said. And that, he said, will require the “recapitalization” of some financial institutions in some countries.
“To put it more bluntly, there is a risk of another financial crisis,” King said.
The former BOE governor noted that, relative to GDP, global debt levels are higher today than in the run-up to the 2008 financial crisis. “If the problem before the [2008] crisis was too much borrowing and too much spending, than the problem today is too much borrowing and too little spending,” King said.
An early task for the incoming Biden administration in the U.S. will be to restore international cooperation so a crisis can be averted, King said.
“The looming wave of debt restructuring, both corporate and sovereign, will be difficult to handle without greater cooperation between countries if we are to avoid another debt crisis,” King said.
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