Excessive credit is weakening the financial systems of 20 countries around the world including the United States, according to an annual survey by Standard & Poor's.
According to a report released by the rating agency this week, credit booms in China, Colombia, the Czech Republic, Indonesia, Latvia, Lebanon, Lithuania, Romania, Slovakia, South Korea, Taiwan, Thailand, and Turkey are raising risks that the banking systems of those countries could run into serious problems.
S&P added that "other seemingly robust systems are vulnerable."
It also named the United States, Cyprus, Egypt, Ireland, New Zealand, Norway, and Panama as among the countries that are accumulating potentially large problem credits.
"Some of these systems' fundamentals are so poor that half of their assets may become problematic," the report stated. "For others, the decline will be relatively mild."
According to estimates by S&P, problem assets range from 35% to 70% of credits to the private sector in China, the Czech Republic, Indonesia, Latvia, Romania, Slovakia, Thailand, and Turkey.
Under a worst-case scenario, S&P predicted, banking systems in those countries could require massive government bailouts running into the tens of billions of dollars.
The collapse of the Mexican banking system in 1995, for example, could wind up costing the Mexican government up to $65 billion.
Most of the systems identified as weak, S&P said, are heading toward problems "because of unsustainable growth of corporate or consumer indebtedness, deflating asset prices, and/or a marked shift in their external position."
However, all is not completely bleak. Eight countries - Hong Kong, Israel, Japan, Malaysia, Oman, the Philippines, Singapore, and the United Arab Emirates - have implemented sounder and more restrained policies for extending credit. However, they too could easily suffer a financial crisis if global financial markets deteriorate, the report noted.
According to data from S&P, Japan had the highest ratio of credit to gross domestic product, at 196%. The Netherlands had the second-highest ratio, at 190%, and South Korea the third-highest, at 181%. Kazakhstan had the lowest ratio, at 8%, followed by Russia, at 11%, and Venezuela, at 12%.
Though loan growth slowed in the United States in 1999, credits to the private sector have climbed from 101% of gross domestic product in 1995 to 142% at close to yearend 1999. And nonperforming loans are increasing, albeit at a modest pace.
However, S&P cautioned that "given the extended duration of the economic expansion, commercial portfolios are likely to have overly optimistic projections embedded in their repayment scenarios."
The rating agency added that such portfolios "are not likely to perform well in a weakening economy."
A sharp correction in the stock market and hard landing for the U.S. economy , S&P forecast, could put 5% to 15% of U.S. bank loans at risk.