Household debt increases crisis risk

Rising household debt boosts short-term economic growth but increases the risk of a medium-term financial crisis, the International Monetary Fund (IMF) said on Tuesday.

"Household indebtedness continued to grow over the past decade," the agency said in a report ahead of its annual meeting next week in Washington.

The IMF studied the relationship between household debt, growth and financial stability through a sample of 80 advanced economies, including those in Australia, Denmark, Switzerland and the Netherlands, and developing countries such as Argentina, Bangladesh , Egypt, Malaysia and Thailand.

"Household debt and access to credit can sustain demand ... but a high level of indebtedness can be a source of financial imbalances," the IMF warned.

And, accumulated from three to five years, household debt eventually weighs on growth and increases the likelihood of a financial and banking crisis, he added.

The IMF gave the example of the global financial crisis to explain that high household indebtedness can lead to "long recessions".

"These negative effects are more pronounced in advanced economies, where household debt is higher than in emerging countries, where the contribution of household debt and the credit market is weaker," he noted.

Although the ratio of debt to Gross Domestic Product (GDP) decreased in the United States and the United Kingdom after the crisis of 2007-2008, as in many European countries such as Iceland, Ireland, Portugal, Spain or the Baltic States , "Is still high," he said.

That percentage has also continued to increase in other advanced economies, such as Australia and Canada, he warned.

In some emerging economies, such as Chile, China, Malaysia, Thailand, Paraguay, Poland and some countries in Central and Southern Europe, the debt ratio increased "very rapidly from 10% of GDP in 2005 to 60% in some cases."

The IMF stressed the importance of sound institutions and adequate policies to mitigate this impact, advocating more effective financial regulation and supervision, less reliance on external financing, and flexible exchange rates and a reduction of inequalities from income.