A Panorama of Global Debt

Valentin KATASONOV | 23.02.2015 | 00:00
In February 2015, the well-known consulting firm McKinsey published a report on the global debt situation as of 2014. The report is called «Debt and (not much) deleveraging» and is based on data from 47 countries around the world. These include the majority of economically developed countries (25) and the largest developing countries (22), which includes China, as well as former socialist countries, including the Russian Federation. According to the report’s authors, this is sufficient coverage to paint a full picture of the global debt situation. It is not the first report by McKinsey on global debt. Previous reports reflected the global debt situation as of the end of 2000 and 2007. The current report captures the debt situation in the middle of 2014. It is therefore possible to assess the changes in the global debt situation over two approximately equal periods of time: 2000-2007 and 2007-2014.

Table 1.

Global debt and its main components between 2000 and 2014

2000* 2007* 2014**
Trillions of dollars % Trillions of dollars % Trillions of dollars %
Total: 87 100 142 100 199 100
Household 19 21.8 33 23.1 40 20.1
Non-financial corporations 26 29.9 38 26.7 56 28.2
Government 22 25.3 33 23.2 58 29.1
Financial institutions 20 23.0 37 26.0 45 22.6
*end of Q4
**end of Q2
Between 2000 and 2007, global debt grew by USD 55 trillion. Over the next period, it grew by USD 57 trillion. While the first period falls within the lead-up phase to the global financial crisis, the second period falls within the crisis itself, the exit from it and the period of temporary stability. As is known, the 2007-2009 global financial crisis was triggered by a sharp rise in global debt. In 2000, the debt level was 246 per cent of global gross domestic product (GDP), but by the beginning of the financial crisis in 2007, according to McKinsey, it had already risen to 269 per cent of GDP. During the second period (2007-2015), the increase in global debt in absolute terms even exceeded the increase during the first period (USD 57 trillion as compared to USD 55 trillion). At the same time, global debt rose to 286 per cent of global GDP. All this is viewed by the report’s authors as worrying signs of an imminent second wave of the global financial crisis.

The authors of the report consider the main components of global debt to be government (public) debt, household debt, the debt of non-financial institutions (corporate debt), and financial sector debt. In 2014, public debt accounted for the most, corporate debt was second, followed by financial sector debt and then household debt. It is interesting that between 2007 and 2014, public debt had the highest growth rate (Table 2). The average annual growth rate of this debt was 9.3 per cent, or an absolute growth of USD 25 trillion. In contrast, the growth rates of household debt and financial sector debt seem rather modest. Interestingly, during the previous period (2000-2007), the rise in global debt was largely accounted for by the financial and household sectors. When comparing the data, the report’s authors come to the cautious conclusion that the current rise in global debt could lead to consequences different from those that brought about the first wave of the 2007-2009 global financial crisis.

Table 2.

The growth in global debt and its main components between 2000 and 2014

 

2000-2007 2007-2014
Average annual growth rate, % Absolute growth value, trillions of dollars Average annual growth rate, % Absolute growth value, trillions of dollars
Total: 7.3 55 5.3 57
Household 8.5 14 2.8 7
Non-financial corporations 5.7 12 5.9 18
Government 5.8 11 9.3 25
Financial institutions 9.4 17 2.9 8

While the relative level of global debt in 2014 was 286 per cent of global GDP, a number of countries had debt levels above the worldwide average. In Holland, for example, it was 687 per cent of GDP, while it was 681 per cent of GDP in India, 628 per cent in Singapore, 537 per cent in Denmark, 517 per cent in Japan, 439 per cent in Portugal, 435 per cent in Great Britain, 415 per cent in Sweden, 402 per cent in Belgium, and 401 per cent in Spain.

For the US and China, the leaders of the world economy, debt levels were even slightly lower than the worldwide average at 269 and 282 per cent respectively. In absolute terms, China’s total debt in 2014 was USD 28.2 trillion, which accounted for 14.2 per cent of global debt. It is clear that the debt situation in countries like the US, China and Japan, as well as a number of European countries, could have a significant impact on the world’s financial and economic situation.

It is noteworthy that the debt levels of ‘golden billion’ countries (so-called economically developed countries) are significantly higher than those of the majority of developing countries.

Of the 47 countries included in the study, Argentina had the lowest debt level at 40 per cent of GDP. Other countries with low debt levels (% of GDP) included: Nigeria – 49; Saudi Arabia – 65; Peru – 70; Colombia – 82; and Mexico – 93. Russia (88 per cent of GDP) was also among the group of countries with a debt level of less than 100 per cent of GDP

There is a strange pattern in the debt statistics of various countries: the higher a country’s debt level is, the higher its credit and investment ratings are according to agencies like Standard & Poor’s, Fitch, and Moody’s. And conversely, countries with low and even junk ratings by the ‘big three’ rating agencies, with some minor exceptions, have relatively modest debt levels. The authors of the report do not pay much attention to this pattern. But with regard to the scandal surrounding Russia’s junk rating in January 2015, the McKinsey report vividly illustrates the objectivity of the big three’s ratings. While Argentina, the country with the lowest amount of debt according to the McKinsey report, is currently on the brink of default.

The report focuses most of its attention on the debt situation in China. According to the authors, debt levels have grown more rapidly in this country than anywhere else. While China’s debt equalled USD 2.1 trillion in 2002, by 2007 it had increased to USD 7.4 trillion, and by 2014 had reached USD 28.2 trillion. Between 2007 and 2014, therefore, it had increased fourfold. Although the report notes that the debt situation in China is under control, this control could be lost at any moment. The McKinsey report alleges that the debt situation in China poses a serious threat not just to the Chinese economy, but to the global economy.

On the whole, the authors of the study are forced to acknowledge that the decisions taken at the height of the 2007-2009 financial crisis regarding the containment and even the reduction of certain types of debt (public, corporate, household, and financial sector debt) have remained wishful thinking. Of the 47 countries included in the study, only eight have managed to reduce the relative level of total debt (Table 3).

Table 3.

Reduction in the relative level of total debt in individual countries between 2007 and 2014

 

% GDP Reduction, percentage points
2007 2014
US 277 269 8
Egypt 125 108 17
Saudi Arabia 87 65 22
Romania 122 111 11
Philippines 129 128 1
Israel 212 190 22
Germany 266 258 8
Argentina 56 40 16

As Table 3 shows, the greatest relative reduction was achieved in Saudi Arabia and Israel. In absolute terms, however, the most substantial reduction in total debt took place in the US. The reduction in the relative level of total debt in the countries listed in Table 3 was achieved through a reduction in the relative level of different types of debt. In Argentina, for example, it was achieved by reducing public and financial sector debt; in Israel by reducing public, corporate, and financial sector debt; in Saudi Arabia by reducing public, household, and financial sector debt; and in the US by primarily reducing financial sector and household debt, as well as (to a lesser extent) corporate debt. No country managed to reduce all four types of debt (public, corporate, financial sector, and household) simultaneously.

In addition, most of the countries included in the study have seen a rise in the relative level of total debt. This relates to 39 countries. Below is a list of countries with the largest increase in the relative level of total debt between 2007 and 2014

Table 4.

Increase in the relative level of total debt in certain countries between 2007 and 2014

 

% GDP Increase, percentage points
2007 2014
Ireland 534 681 147
Portugal 301 439 138
China 158 282 124
Greece 218 322 104
Holland 587 687 100

Particularly noticeable is the fact that economically developed countries far outstrip developing countries when it comes to the growth rate of total debt, with the exception of China, Singapore, Malaysia and Thailand. The increase in the relative level of total debt for these four countries exceeded 50 percentage points.

Russia’s total debt between 2007 and 2015 increased by 15 percentage points, from 73 to 85 per cent of GDP. The growth of individual types of debt in Russia equalled (percentage points): public debt – 3; corporate debt – 9; household debt – 7. Financial sector debt over this period fell by 4 percentage points.

For the majority of the countries, the main contribution to the rise in total debt was made by the growth of public debt, followed by the growth of corporate debt.

Advertisements