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.