Rising global debt threatens financial stability, warns former ECB president

Jean-Claude Trichet, a French economist and a former president of the European Central Bank, speaks in a press conference held at Lotte Hotel in central Seoul on Wednesday. [KDI]

Indebtedness and slow globalization are some of the biggest risks faced by the global economy, including Korea, according to Jean-Claude Trichet, a French economist and a former president of the European Central Bank.

“Overindebtedness is a problem for all economies,” said Trichet at a press conference held at Lotte Hotel in central Seoul on Wednesday.

The event took place on the sideline of his visit to attend the G20 Global Financial Stability Conference 2023, hosted by the Ministry of Economy and Finance and Korea Development Institute (KDI), where he gave a keynote speech on inflation and reflected on global economic and financial risks.

He said that overindebtedness means there is a probability of having a new financial crisis in most vulnerable sectors and countries, which are “part of global risks.”

Global debt hit a record $307 trillion in the second quarter, lifting the global debt-to-GDP ratio to 336 percent.

Korea’s household debt has also been concerning. The debt accounted for 102.2 percent of the country’s nominal gross domestic product in the first quarter, being the only country whose household debt exceeded its GDP in the period.

Trichet added slow globalization or deglobalization will also be a major blow to the Korean economy, which is a heavy participant in global trade.

Trichet stressed the importance of having to “gain control over inflation” in order to prevent what the world experienced following the global oil crisis in the 1970s through early 80s.

But he added that situations back then and now are different due to the different attitudes of central banks when responding to inflation.

Central banks are “extremely keen on” combating inflationary challenge. He added that central banks, including those in the United States and Europe, are able to “drastically change their monetary policy” unlike in the past when they did not take inflation seriously.

Part of the measures to combat inflation is to make sure central banks and the government policies move in the same direction.

Trichet said that the augmentation of policy rate by a central bank and the government’s expansion of fiscal policy should not happen simultaneously.

In his keynote speech, Trichet said that he remains “reasonably optimistic” about regaining control of inflation in the medium term.

“Central banks of the emerging countries proved generally highly responsible in countering inflation. Central banks of advanced economies, after initial hesitation, also demonstrated appropriate determination to regain control of inflation.”

He added, “Despite the inflationary surge since 2021, we have not observed a destabilization of the inflation expectations in a medium term [three to four years] basis. This is reassuring, even if the game is not over.”

BY JIN MIN-JI [jin.minji@joongang.co.kr]