Debt Deleveraging’s Stubborn Stuck Gears
The McKinsey Global Institute in another profile of post-crisis global debt trends lamented the absence of deleveraging in both absolute and percent of output terms, with the amount up $60 trillion since 2007 to 285 percent of GDP. Government increase has been almost half the figure and barring dramatic economic growth or fiscal adjustments the burden will continue to rise with restructuring an alternative that could become smoother. “Damaging” shadow banking has fallen, but non-bank corporate bonds and other credit have filled gaps from new regulatory constraints. Households outside the main crisis countries the US, UK, Ireland and Spain have borrowed more, and debt-income ratios are above previous peaks with rigidities in mortgage contracts and bankruptcy laws. China’s real estate-related load quadrupled over the period to $28 trillion last year, and although the 285 percent of GDP sum exceeds the US it is “manageable” as unregulated trust and unsustainable local government channels are flushed out, the think tank believes. In its 50 economy sample roughly split between the developed and developing world only five in the latter group—Argentina, Romania, Egypt, Israel and Saudi Arabia—experienced reductions the past seven years while fifteen in both categories hiked debt/GDP at least 50 points. Greece, Hungary, Malaysia and South Korea are in the top 20, and emerging markets altogether contributed half of aggregate and three-quarters of corporate and household debt growth although their 120 percent of GDP average is modest compared with almost triple that level in advanced economies. The respective government debt jumps were $6 trillion and $19 trillion reflecting in part a common G-20 commitment to budget stimulus. Deleveraging in the worst cases like Japan, Portugal, France and Italy will require 2 percent of GDP annual austerity, and an export boom as in 1990s Finland and Sweden is also remote with weak global demand. Residential borrowing is above 200 percent of income in Denmark and the Netherlands and has also reached critical thresholds in Asian markets such as Korea and Thailand. Financial sector debt had roughly doubled from 2000-07 to near $40 trillion, but $3 trillion in US off-balance sheet structures have since been eliminated, according to the research. However mainstream corporate bond activity has quadrupled in the aftermath to $4.5 trillion and dedicated hedge fund and online lending platforms are new non-bank competitors.
China’s potential risks loom large, as extrapolating the present growth pace will produce a 400 percent of GDP total by 2018. Half the existing stock could be associated with property and a correction is now underway directly impacting housing construction which represents 15 percent of output. Thousands of small developers may be unable to service high-cost shadow borrowing estimated at $6.5 trillion or one-third of non-financial sector debt. Trust and wealth management products sold through banks create a “false guarantee impression” and entrusted loans can “ripple” defaults between companies. In a dire scenario of 80 percent lost real estate credit value a Beijing rescue would add 25 percent to official debt as deflated bubbles reinforce headline price readings, the review suggests.
