The near-term threat looks to be increasing due to three developments: a rising U.S. dollar, low oil prices and the U.S. Federal Reserve's plan to tighten rates.

To be clear, the vast majority of borrowers will still be fine in this new environment. But a handful of debt hot spots demand closer scrutiny. Some debt risks are entirely real but not very important.

For instance, Greece is highly likely to default again on its public debt. But few private-sector bondholders remain involved in the market, Greece already defaulted in 2011 with little backlash and any future debt reduction is more likely to be in the form of coordinated "debt relief" than an uncoordinated default.


Other potential problems trigger at such a late date that they are unlikely to figure into financial market thinking for now. The prime example is developed-world public debt, which now tops 100 per cent of GDP. While this is lofty, few sovereigns are struggling due to ultra-low borrowing costs.

Even as borrowing costs rise over the next several years, the long maturity of sovereign debt and the fact that sovereigns are able to recoup a significant fraction of their coupon payments via taxation and central bank repatriation argue that the risk - while rising - is not truly high.

Developed-world public debt only becomes a major problem over a multi-decade horizon as the pairing of deteriorating demographics and status-quo entitlement programs send public debt loads blazing toward 200 per cent of GDP.

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On the other hand, Chinese credit is a high risk with potentially far-reaching consequences. The Middle Kingdom has rapidly accumulated private financing that now totals a startling 200 per cent of GDP. The Bank for International Settlements debt-threat dashboard blinks red on every relevant measure for the country. Much of the debt accumulation relates to a once-hot housing market that now wobbles, threatening builders, local governments and banks alike.

Already, China's banks report non-performing loan growth of 52 per cent a year.

Of course, China is a special country. It has tight capital controls, an unusually unburdened national government and a history of bailing out its constituents from credit messes. As such, its debt problems are unlikely to cannonball directly into the global credit pool.

A rising rate environment serves up exuberant housing markets as another high risk, but one with rather limited global significance given that only a tiny fraction of countries are in this fevered state. Alas, this is a limited consolation for Canadians, given their membership in that exclusive group.

Another risk of considerable relevance to Canada is oil-oriented debt. The world's energy firms have nearly tripled their indebtedness since 2006 and OPEC sovereigns are incapable of balancing their budgets at current prices. History demonstrates that corporate distress in the oil space usually surfaces around a year after an oil shock, meaning the next six to nine months should be revealing.

Corporate debt provides a grab bag of elevated globally significant vulnerabilities. Many emerging-market economies (such as China) levered up quickly. They experience little distress today, but are vulnerable to higher borrowing costs in the future. Meanwhile, bottom-up analysis finds that about half the corporations in Portugal, Nigeria and Spain spend more than 50 per cent of their earnings servicing their debt. This is a worryingly high fraction, especially at the onset of rising rates.

Finally, emerging-market external debt has grown by an eye-watering $2.5-trillion (U.S.) since 2007. U.S. dollar-denominated debt remains a particularly popular variety, making the rising greenback especially troublesome. There is a long history of dollar bull markets translating into emerging-market debt crises. Most countries have acquired useful shielding since the last such episode, but external debt still represents an elevated risk with high global significance.

Given all of these debt hot spots, a brush fire somewhere is practically inevitable. Individually, any one problem can likely be weathered by policy-makers and market participants without too much disruption to the global economy. However, if multiple problems arrive at once - potentially hopscotching from one hot spot to another - all bets are off.

The era of uncertainty is not over yet.

This article originally appeared in the Globe & Mail on Aug. 19, 2015.