Trillions in US net worth vulnerable to recession: IMF

Economists now say the chances of a recession in the United States are growing due to several factors, including trade tensions and mounting interest rates. PHOTO: AFP

WASHINGTON (AFP) - A severe recession would slash United States public wealth by about US$5 trillion (S$6.9 trillion), causing vastly more damage to Washington's finances than just an increase in debt and deficits, the International Monetary Fund (IMF) warned on Tuesday (Oct 9).

Yet governments around the world, many of which face similar dangers, do not clearly publicise their overall net worths, the IMF said in a new report.

This creates a potential blind spot for policymakers who could use this knowledge to head off economic risks, it said.

The global crisis lender, which is staging its annual meetings with the World Bank in Indonesia this week, cut its outlook for global gross domestic product on Monday by two tenths to 3.7 per cent through next year.

The fund pointed to rising trade tensions as a cause for worry and also predicted slower growth in the US next year and beyond.

Economists now say the chances of a recession in the US are growing due to several factors, including trade tensions and mounting interest rates.

Beyond tax revenues and sovereign debts, a government's balance sheet contains a range of other assets and liabilities, such as the state enterprises, land and natural resources it owns as well as the money it has to pay to fund public-sector employee pensions.

The difference between the two sides of the ledger is a country's net worth.

"The scars from the global financial crisis are still evident on public wealth a decade later," the report said, adding that the net worth of 17 advanced economies together was now US$11 trillion lower than it had been prior to the crisis.


Countries that take such a broad approach to their finances may face lower borrowing costs and see higher revenues, making them more resilient in a downturn, the report said.

But after a decade of recovery, the net worths of most Group of Seven economies are now negative, it said.

China's net worth has deteriorated to 8 per cent of GDP because of off-budget borrowing by local authorities and poor returns from powerful government-run businesses, the IMF found.

Meanwhile, the net worth of the US has been in decline for nearly four decades. Worsening notably due to the global financial crisis, it had sunk by 2016 to negative 17 per cent as a share of GDP, the report said.

The federal mortgage giants Fannie Mae and Freddie Mac, which the government took over during the crisis, have lent a staggering amount - 44 per cent of GDP - to the private sector.

But the biggest source of risk comes from state and local government retirement pensions, which can lose money when Wall Street sinks - meaning the shortfall has to come out of local government budgets.

Towns and states then have to cut spending elsewhere, creating a drag on the economy.

Nationwide, such pension funds are already underfunded by about 8 per cent of GDP.

Using a hypothetical "stress test" scenario developed by the US Federal Reserve for banking regulation, the IMF found a severe recession would cut the value of America's publicly held assets by an amount equal to 26 per cent of GDP by 2020.

At current levels, that would amount to about US$5 trillion.

The scenario, which imagines a deep global recession, rising interest rates but collapsing stock and real estate prices, would see sovereign debt balloon by 9 per cent but net worth dive by another 17 per cent, mainly because falling real estate prices would drag down the value of publicly owned structures.

Defaults on mortgages and student loans as well as pension fund shortfalls would all jump sharply, the report found.

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