C&B Notes

Global Debt Has Ballooned Since ’07

Despite some deleveraging by US households, a recent study by McKinsey reports that worldwide debt in nearly all of the 47 countries that it researched has grown in both absolute terms and relative to GDP.

Global Debt chart

    • Debt continues to grow. Since 2007, global debt has grown by $57 trillion, raising the ratio of debt to GDP by 17 percentage points. 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.