Global Debt And (Not Much) Deleveraging via McKinsey & Company
After the 2008 financial crisis and the longest and deepest global recession since World War II, it was widely expected that the world’s economies would deleverage. It has not happened. Instead, debt continues to grow in nearly all countries, in both absolute terms and relative to GDP. This creates fresh risks in some countries and limits growth prospects in many.
- Debt continues to grow. Since 2007, global debt has grown by $57 trillion, or 17 percentage points of GDP.* Developing economies account for roughly half of the growth, and in many cases this reflects healthy financial deepening. In advanced economies, government debt has soared and private-sector deleveraging has been limited.
- Reducing government debt will require a wider range of solutions. Government debt has grown by $25 trillion since 2007, and will continue to rise in many countries, given current economic fundamentals. For the most highly indebted countries, implausibly large increases in real GDP growth or extremely deep reductions in fiscal deficits would be required to start deleveraging. A broader range of solutions for reducing government debt will need to be considered, including larger asset sales, one-time taxes, and more efficient debt restructuring programs.
- Shadow banking has retreated, but non?bank credit remains important. One piece of good news: the financial sector has deleveraged, and the most damaging elements of shadow banking in the crisis are declining. However, other forms of non?bank credit, such as corporate bonds and lending by non?bank intermediaries, remain important. For corporations, non?bank sources account for nearly all new credit growth since 2008. These intermediaries can help fill the gap as bank lending remains constrained in the new regulatory environment.
- Households borrow more. In the four “core” crisis countries that were hit hard—the United States, the United Kingdom, Spain, and Ireland —households have deleveraged. But in many other countries, household debt-to-income ratios have continued to grow, and in some cases far exceed the peak levels in the crisis countries. To safely manage high levels of household debt, more flexible mortgage contracts, clearer personal bankruptcy rules, and stricter lending standards are needed.
- China’s debt is rising rapidly. Fueled by real estate and shadow banking, China’s total debt has quadrupled, rising from $7 trillion in 2007 to $28 trillion by mid-2014. At 282 percent of GDP, China’s debt as a share of GDP, while manageable, is larger than that of the United States or Germany.* Several factors are worrisome: half of loans are linked directly or indirectly to China’s real estate market, unregulated shadow banking accounts for nearly half of new lending, and the debt of many local governments is likely unsustainable.
It is clear that deleveraging is rare and that solutions are in short supply. Given the scale of debt in the most highly indebted countries, the current solutions for sparking growth or cutting fiscal deficits alone will not be sufficient. New approaches are needed to start deleveraging and to manage and monitor debt. This includes innovations in mortgages and other debt contracts to better share risk; clearer rules for restructuring debt; eliminating tax incentives for debt; and using macroprudential measures to dampen credit booms. Debt remains an essential tool for funding economic growth. But how debt is created, used, monitored, and when needed discharged, must be improved.
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Global Debt And (Not Much) Deleveraging – Executive summary
Seven years after the global financial crisis, global debt and leverage have continued to grow. From 2007 through the second quarter of 2014, global debt grew by $57 trillion, raising the ratio of global debt to GDP by 17 percentage points (Exhibit E1). This is not as much as the 23-point increase in the seven years before the crisis, but it is enough to raise fresh concerns. Governments in advanced economies have borrowed heavily to fund bailouts in the crisis and offset falling demand in the recession, while corporate and household debt in a range of countries continues to grow rapidly.
There are few indicators that the current trajectory of rising leverage will change, especially in light of diminishing expectations for economic growth. This calls into question basic
assumptions about debt and deleveraging and the adequacy of the tools available to manage debt and avoid future crises. We find it unlikely that economies with total non?financial debt that is equivalent to three to four times GDP will grow their way out of excessive debt. And the adjustments to government budgets required to start deleveraging of the most indebted governments are on a scale that makes success politically challenging.
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