IF THERE IS any kind of consensus that has emerged in the past year about the global economy and financial markets, it is that there is too much debt in the system. The last recession unfortunately never did expunge all the imbalances, especially when it comes to the level of overall debt the global economy can truly support. Governments around the world protected their banks, and in so doing issued tremendous amounts of triple-A-rated debt that in many cases is either no longer ranked that pristinely nor being treated that way.
In this symbiotic relationship, the banks that were saved by the governments ended up buying a whole lot of the debt of these sovereigns as they issued more and more to save the financial system and the economy. And the end result was that over the past three years, total OECD net government debt relative to GDP soared 30 percentage points to more than 100%. Both the scope and size of this overhang is unprecedented.
Now we have a situation where this government debt is being downgraded or losing its value and the banks that own it are in a position where they have to raise expensive capital yet again.