Can This Time Be Different? Policy Options in Times of Rising Debt

Episodes of debt accumulation have been a recurrent feature of the global economy
over the past fifty years. Since 2010, emerging and developing economies have
experienced another wave of historically large and rapid debt accumulation. Similar past
debt buildups have often ended in widespread financial crises in these economies. This
paper examines the factors that are likely to determine the outcome of the most recent
debt wave, and considers policy options to help reduce the likelihood that it ends again
in widespread crises. It reports two main results. First, the rapid increase in debt has
made emerging and developing economies more vulnerable to shifts in market
sentiment, notwithstanding historically low global interest rates. Second, policy options
are available to lower the likelihood of financial crises, and to help manage the adverse
impacts of crises when they do occur. These include sound debt management, strong
monetary and fiscal frameworks, and robust bank supervision and regulation. The postcrisis
debt buildup has coincided with a period of subdued growth as well as the
emergence of non-traditional creditors. As a result, policy priorities also need to ensure
that debt is spent on productive purposes to improve growth prospects and that all debtrelated
transactions are transparently reported.