Mumbai: While rising household debt is a matter of concern for policy makers across the world, a new study has revealed that excessive corporate debt is just as problematic as excessive household debt.
Warning emerging market economies about the perils of ignoring rising corporate leverage, a blog published in the Asian Development Bank’s (ADB) website claimed that 12 out of 26 financial crisis in emerging market economies between 1970 and 2014 were corporate driven. “We found 17 emerging market economies suffered 26 financial crisis peaks in 1970-2014. Of those, 12 were corporate-debt driven (the corporate debt build up was faster than the household debt build-up) and 10 were household-debt driven,” it said.
Though the growth rates of output, consumption and investments are comparable in the period running up to the financial market-induced crises as in the run-up to other types of downturns in emerging market crisis, a further analysis revealed that the contractions are much sharper following financial market induced crisis that other types of downturns.
“However, when we drill down we find that when crises are induced by high corporate debt, growth in output, consumption, and investment are all slightly lower during the pre-crisis expansion and during the post crisis period than when crises are induced by household debt build-up,” the report added.
