Looking across the countries we cover in our Global Debt Monitor, non-financial corporate debt is at a record high of $75 trillion—up by $16 trillion since the 2013 taper tantrum.

The Euro zone current account balance is in sizeable surplus, which some see as a sign the Euro is undervalued and needs to rise. But the headline surplus in part reflects persistently large output gaps, which may be inflating the external balance by depressing import volumes. We derive a cyclically-adjusted current account balance for the Euro zone, which turns out to be negative, potentially signaling Euro overvaluation.
 

Estimates for Euro periphery output gaps are oddly small, even where real GDP has fallen substantially in the last 10 years. These estimates implicitly assume lots of activity is permanently lost, with potential “bending” down, almost as if to validate low actual GDP. The reality is that economic slack on the periphery is likely still sizeable, and holding down underlying inflation despite unprecedented ECB easing.

In this edition of Sticky Notes, we look at takeaways from the U.S. mid-term elections, the latest U.S.-China trade talks, Brazil in the wake of a newly elected government, and U.S. soybean exports.

EM bank lending conditions tighten further in 2018Q3. Credit standards and funding conditions weakened more in Q3, as trade finance and the demand for loans began tightening. EM Europe saw their conditions worsen the most, while Sub-Saharan Africa was the only region to improve. Respondents expect less tightening in lending conditions for Q4.

One factor behind global equity market jitters: the growing focus on credit risk. Credit spreads have widened only modestly in 2018, but look increasingly vulnerable to a trigger event. Rising rates highlight vulnerabilities in housing markets. Less reliance on hard-currency debt in EM Asia ex-China, but more in Africa/Middle East. 
 

• Sanctions lowered capital flows to Russia permanently, limiting severely the ability of banks to borrow abroad.
• Risk of new sanctions put pressure on government flows. We assess scope for contagion from expanded sanctions.
• Foreign bank exposures to Russia shrunk significantly, and would be manageable under expanded sanctions.

Private sector balance sheets are susceptible, at varying degrees, to external debt rollover risk and lira depreciation. Under the currently improving, yet fragile, investor sentiment, Turkey’s sizable amortization payments will continue to expose the economy to high rollover risk through 2019. 

Global debt declined by $1.5 trillion to $247 trillion ($187 trillion ex-financials) in Q2 2018-mainly driven by mature markets. In contrast, EM debt continues to rise, topping $71 trillion in Q2 ($60 trillion ex-financials).