A previously unknown term — “deleveraging” — became a household word in 2008, amid the global financial crisis. It was understood that many households owned more mortgage debt than they could afford, precipitating the subprime mortgage crisis.
Similarly, financial institutions had too little capital relative to the risk they were taking, hence the Lehman crisis.
Meanwhile, the Fed’s massive balance sheet expansion, the Obama administration’s stimulus program, Affordable Care Act (Obamacare) and rising deficits provoked worry among many that government was becoming excessively indebted (while others maintained that government indebtedness was needed to balance a lack of consumer demand).
In any event, the much discussed expectation was that the world, post-crisis, would be going through a period of deleveraging.
But a new report by global consulting firm McKinsey & Co. reveals that that deleveraging has not happened; rather debt has continued to accumulate to ever-high levels, in both absolute and relative-to-GDP terms.
The report, the third in a series by the McKinsey Global Institute since the onset of the 2008 financial crisis, is titled “Debt (and Not Much) Deleveraging,” and warns the world’s rising debt may add risk to global financial stability while potentially undermining economic growth.
Specifically, global debt of $142 trillion in Q4 2007 rose to $199 trillion by Q2 2014. That $57 trillion increase, expressed relative to global GDP, represents a 17% higher debt level — from 269% to 286% of debt to GDP.
Most of that debt expansion stemmed from government debt issuance, which rose to a compound annual growth rate of 9.3% in the period since the global financial crisis compared with pre-crisis debt growth of 5.8%. But households and the financial sector have also added to total debt (albeit at a lower rate than pre-crisis) while corporate debt has largely kept pace with pre-crisis levels.
In its analysis, the McKinsey Global Institute looked at 47 countries — 22 advanced and 25 developing. Nearly all were leveraging rather than deleveraging, with Ireland leading the pack, increasing real-economy debt by 172 percentage points. Only five countries studied have deleveraged since the global financial crisis — Israel by the most, having reduced its national debt by 22 percentage points.
Herewith the 20 countries with the highest current level of debt relative to GDP:
Debt-to-GDP ratio: 222%
The Asian nation added 49 percentage points to its national debt since 2007.
Debt-to-GDP ratio: 225%
Austria added 29 percentage points to its total national debt, but has made notable progress in its financial sector, where debt has fallen 21% since 2007, McKinsey Global Institute says.
Debt-to-GDP ratio: 225%
Austria’s former dual-monarchy imperial partner added 35 percentage points to its total national debt since 2007.
17. South Korea
Debt-to-GDP ratio: 231%
Once known as a lean and mean Asian tiger, South Korea has added 45 percentage points to its total national debt since 2007.
16. United States
Debt-to-GDP ratio: 233%
While the U.S. has added 16 percentage points to its total national debt, households have reduced debt by 18% and the financial sector by 24% since 2007. Government debt growth of 35% is the source of U.S. leveraging in the post-crisis period.
Debt-to-GDP ratio: 238%
The Scandinavian nation added 62 percentage points to its national debt since 2007.
Debt-to-GDP ratio: 244%
Finland’s Scandinavian neighbor (the two countries share a northern border) added 13 percentage points to its national debt since 2007, though Norway reduced government sector debt by 16 percentage points, while leveraging up in the corporate, household and financial sectors.
13. United Kingdom
Debt-to-GDP ratio: 252%
The U.K. added 30 percentage points to its national debt since 2007, with government debt rising 50 percentage points while corporations and households deleveraging by 12 and 8 percentage points respectively.
Debt-to-GDP ratio: 259%
Italy added 55 percentage points to its national debt since 2007, mostly in the government sector.
Debt-to-GDP ratio: 280%
Italy’s northern neighbor followed the same trend line, adding 66 percentage points to its national debt since 2007, mostly in the government sector.
Debt-to-GDP ratio: 290%
Northern Europe was generally thought to be more debt-averse during Europe’s debt crisis, but the numbers show that Sweden followed a similar trend as France and Italy, adding 50 percentage points to its national debt since 2007; unlike France and Italy, however, most of that debt was in the country’s corporate and financial sectors rather than government.
Debt-to-GDP ratio: 302%
Scandinavia’s most indebted nation added 37 percentage points to its national debt since 2007, mostly in the financial sector.
Debt-to-GDP ratio: 313%
Spain’s debt problems received much news coverage in recent years, with the Mediterranean nation adding 92 percentage points in government debt while deleveraging at the household, corporate and financial level.
Debt-to-GDP ratio: 317%
Greece has garnered the most attention for debt troubles of any European nation . Since the crisis, it has added 103 percentage points in total debt, mostly in the government sector.
Debt-to-GDP ratio: 325%
The Netherlands added 62 percentage points to its national debt since 2007.
Debt-to-GDP ratio: 327%
The Netherlands’ lowland neighbor followed the same trend line as its Dutch neighbor, adding 61 percentage points to its national debt since 2007.
Debt-to-GDP ratio: 358%
The troubled Mediterranean economy has surpassed Greece in total debt, though it has taken on a hair less fresh debt, adding 100 percentage points since 2007.
Debt-to-GDP ratio: 382%
The island nation’s added 129 percentage points to its total national debt since 2007, mostly through the city state’s 92 percentage-point leveraging of its corporate sector.
Debt-to-GDP ratio: 390%
One of the four so-called “peripheral” nations at the height of the eurozone’s debt crisis, Ireland has added 172 percentage points to its total national debt since 2007, particularly in the government and corporate sectors (while deleveraging by 25 percentage points in its financial sector).
Debt-to-GDP ratio: 400%
The large Asian industrial center was already heavily indebted by the time of the 2007 crisis, but has added a further 64 percentage points to its total national debt since then, almost entirely through government debt.
Says the McKinsey Global Institute in just one cautionary statement found in the 123-page report:
“To generate the growth needed to begin reducing government debt ratios in the most indebted nations today would require real GDP growth rates far higher than are currently projected…The Japanese economy would have to grow almost three times as fast as the consensus outlook—2.9 percent vs. 1.1.”
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