Risks due to low interest rates and high debt

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The low interest rates and high outstanding debts pose risks to the stability of financial markets. Due to the low interest rates, there are also few incentives to reduce debts, which can lead to problems if market sentiment becomes negative. This is what De Nederlandsche Bank (DNB) writes in its half-yearly Overview of Financial Stability.

Global debts have risen sharply since 2005, DNB notes. The joint debts of households, non-financial companies and governments last year were 230 percent of the gross domestic product. In 2005 that was 200 percent.

In some countries, specific problems may arise due to high debts. For example, there are many risky corporate debts in the United States. Business debts are also relatively high in the Netherlands.

Elsewhere in Europe, such as in Italy, Portugal and Greece, government debts are very high. It is precisely in those countries that little has been done to reduce debt, and in some countries they have even risen in the last five years. Problems in those countries can trigger a shock wave that can harm the economy. Brexit and the consequences of a trade war can also have such an effect.

In the Netherlands, the deterioration in affordability of homes and the shortage on the housing market are the greatest risks to stability. Developments in the housing market generally reinforce fluctuations in the business cycle. A fall in house prices can therefore have significant consequences for the economy and the banking sector.

About the author

Oliver I. Kjeldsen

Oliver I. Kjeldsen has a corporate finance and extensive expertise in company audit. He grants us amazing insights on taxation, international affairs and friendly advice on nearly any topic of interest. His email is [email protected]

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