Lord King has warned that a world-wide debt binge could trigger the next financial crisis, leading the western world back into recession.

There has been massive borrowing over the last 8 years by not just households and companies but governments also.

As growth picks up, a decade on from the financial crash, households and companies are bracing themselves for a steep rise in interest rates.  This fear has led to the recent massive falls in the stock markets.

Many experts are now warning that higher interest rates will push up the costs of servicing the world’s huge debts, with potentially devastating consequences.

King stated that it is essential to tackle the global debt pile, which stands at £166 trillion.

King goes on to state that “the areas of weakness in the current system are really focused on the amount of debt that exists, not just in the USA and UK but across the world”.

Commenting on the specific UK picture he goes on to say “debt in the private sector relative to GDP is now higher than it was in 2007, and of course public debt is even higher still”.

He believes the next financial crisis may originate, not from countries whose banks are now more heavily regulated but from less regulated countries. China is funding loans to companies with poor ability to pay them back and if China heads towards a debt crisis that could trigger a world-wide recession.

It is certainly an irony that these fears are now surfacing given that they were instigated by what is in effect good economic news and growth in the western economy.  The fears give rise however because this growth would lead to a rise in interest rates which would make world-wide debts more difficult to service.  This could lead to insolvency in the private sector leading to bankruptcy for individuals as an obvious conclusion. There could be insolvencies in the economy with many companies going into liquidation or administration and this is also not to mention the ongoing government debt which in Britain we have been trying to pay down since the financial crisis but have not succeeded in doing so.

My focus is more on individuals and how they would manage if there was an increase in interest rates. If individuals or households are up to the limit with debt or indebtedness then any rise in interest rates would mean that individuals may become insolvent. Insolvency simply means that an individual is unable to service their debts on a month to month basis and consequently may look to resolve their problem debt by seeking debt advice.  That advice may look at different insolvency solutions such as an Individual Voluntary Arrangement or even bankruptcy.

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