The next economic crisis is almost here -- will it be worse than 2008?

• Global bankruptcy expert Professor Edward Altman warns that global debt levels are too high
• Macro-economic data, Fed's policy, oil and gold prices, all point to an unfolding recession
• Unsecured, short-term credit to corporates has ballooned in India too
• On the other hand, S&P Global Ratings expects the next crisis to be milder than the one in 2008

The US Federal Reserve set off alarm bells when it unexpectedly decided not to hike interest rates. The signal from Fed has eroded the markets' confidence in the world's largest economy and triggered fears of another recession. And when a giant economy like America wobbles, panic is inevitable.

Markets are tumbling across the world and India is no exception. Benchmark indices, Sensex and Nifty, fell as much as a percent on Monday as investors were gripped by the fears of a global crisis. And the next economic crisis may be bigger than the one in 2008, according to global bankruptcy expert Professor Edward Altman.

"Impact of the crisis will depend on the level of debt. Debt levels in US are twice as much as it was just before 2008 crisis. Default rate when it rises it will rise against a lot more debt than ever before," Altman told Business Insider in an interview in February. "Default rates peak after a recession," he added.

The total debt in US was 231% of the country's gross domestic product (GDP) compared to 208% in June 2008, according to S&P Global Ratings. US corporate debt has gone from nearly $4.9 trillion in 2007, before the crisis blew up, to nearly $9.1 trillion by June 2018, according to Securities Industry and Financial Markets Association data quoted by CNBC in November last year.

The picture may be equally ominous even for India, where government debt-to-GDP ratio is 68.4%. The only other emerging economy whose debt situation is worse than that of India is Brazil, according to an analysis by Motilal Oswal.

Not just the government, one in every $10 lent to emerging market corporates, is reportedly borrowed by a company in India. “A significant global economic slowdown may trigger a severe risk-off, which could spill over into our markets,” Upasana Bharadwaj, senior economist at Kotak Mahindra Bank told Reuters.

Higher the debt, deeper the crisis

As Indian banks found themselves saddled by bad loans, and the corrective measures constrained them from lending more, companies gravitated towards bond markets, ratings agency Crisil said in a report last year.



Within India, corporate borrowing via commercial papers has risen ten-fold in the last eight years and the outstanding debt on that account has quadrupled, according to Crisil.

Commercial paper is an unsecured, short-term loan used by a corporation to meet immediate funding requirements like working capital, inventories, and receivables.


While companies have not borrowed from banks directly, 30% of all outstanding commercial paper were held by banks at the end of March 2018.

A weaker global economy will further dent demand for exporting countries like India, which is already feeling the heat from rising protectionism in developed countries. The growing fear is if the global economy weakens then many borrowers may default on their loans.


Even the recent rebound is coming off a very low-base in exports. Falling exports and rising imports lead to a rise in borrowing cost, weaker rupee, and higher inflation.

"Debt is a double-edged sword, but people and politicians forget it," Altman added.

Not everyone agrees

However, there are optimists around. "Although another credit downturn may be inevitable, we don't believe it will be as bad as the 2008-2009 global financial crisis," according to credit analyst Terry Chan from S&P Global Ratings.

The reason for Chan's optimism is that the rise in debt is largely at the government end, and lesser at household or corporate level.

"The high ratio of domestic funding for Chinese corporate debt also reduces contagion risk, because we believe the Chinese government has the means and the motive to prevent widespread defaults," S&P reportedly said.

Simply put, the impact of defaults may not spread as widely around the world as it did in 2008, because, this time, companies in China borrowed from local lenders and not from those abroad.

The fear is spreading

On the other hand, fear itself can be the starting point of a credit crunch. "Estimates for growth and earnings have been revised down materially across all major regions," according to Morgan Stanley.

The yield on US 10-year government bonds fell below the three-month bonds for the first time since 2007. Such moves have historically signalled a possible recession in the near future. German manufacturing growth too, slumped to the lowest level since the financial crisis.

Gold prices are rising and crude oil prices falling, are other signs confirming that the market is getting increasingly jittery.

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