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A global crisis on the horizon?

Whilst the price of oil tumbles, China's economy isn't traveling all that well and share markets are seemingly in meltdown, this piece "Toxic Loans Around the World Weigh on Global Growth" from The New York Times paints a sobering picture of what looks like a possible global crisis emerging again.

"Beneath the surface of the global financial system lurks a multitrillion-dollar problem that could sap the strength of large economies for years to come.

The problem is the giant, stagnant pool of loans that companies and people around the world are struggling to pay back. Bad debts have been a drag on economic activity ever since the financial crisis of 2008, but in recent months, the threat posed by an overhang of bad loans appears to be rising. China is the biggest source of worry. Some analysts estimate that China’s troubled credit could exceed $5 trillion, a staggering number that is equivalent to half the size of the country’s annual economic output.

Official figures show that Chinese banks pulled back on their lending in December. If such trends persist, China’s economy, the second-largest in the world behind the United States’, may then slow even more than it has, further harming the many countries that have for years relied on China for their growth.

But it’s not just China. Wherever governments and central banks unleashed aggressive stimulus policies in recent years, a toxic debt hangover has followed. In the United States, it took many months for mortgage defaults to fall after the most recent housing bust — and energy companies are struggling to pay off the cheap money that they borrowed to pile into the shale boom.

In Europe, analysts say bad loans total more than $1 trillion. Many large European banks are still burdened with defaulted loans, complicating policy makers’ efforts to revive the Continent’s economy. Italy, for instance, announced a plan last week to clean out bad loans from its plodding banking industry."

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