Unbaking the GFC cake

Posted | 09/02/2015 / Views | 4775
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McKinsey Global Institute have released a 136 page extensively researched report entitled “Debt and (Not Much) Deleveraging”.  The following excerpt gives a short snapshot of another, deeper, debt induced crisis in the making.

“What Happened to Deleveraging?  The global financial crisis of 2007–08 was sparked by the accumulation of excessive debt and leverage in many advanced economies, particularly in the household and financial sectors. After the September 2008 collapse of Lehman Brothers, governments took unprecedented actions to preserve the financial system. One reasonable expectation in the years following the crisis and the ensuing global recession was that actors across the economy would reduce their debts and deleverage. However, rather than declining, global debt has continued to increase. Total global debt rose by $57 trillion from the end of 2007 to the second quarter of 2014, reaching $199 trillion, or 286% of global GDP. Rising government debt in advanced economies explains one-third of the overall growth, as falling tax revenue and the costs of financial sector bailouts raised public sector borrowing. Growing debt of developing economies accounts for half of the growth. China’s total debt has quadrupled since 2007, reaching $28 trillion, accounting for 37% of growth in global debt.”

“Government debt has grown by $25 trillion since 2007, and will continue to rise in many countries, given current economic fundamentals… Government debt in advanced economies increased by $19 trillion between 2007 and the second quarter of 2014 and by $6 trillion in developing countries.”

“The value of corporate bonds outstanding globally has grown by $4.3 trillion since 2007, compared with $1.2 trillion from 2000 to 2007.”

 “There are few indicators that the current trajectory of rising leverage will change, especially in light of diminishing expectations for economic growth. This calls into question basic assumptions about debt and deleveraging and the adequacy of the tools available to manage debt and avoid future crises.”

“It is clear that deleveraging is rare and that solutions are in short supply.”

“A large body of academic research shows that high debt is associated with slower GDP growth and higher risk of financial crises. Given the magnitude of the 2008 financial crisis, it is a surprise, then, that no major economies and only five developing economies have reduced the ratio of debt to GDP in the ‘real economy’ (households, nonfinancial corporations, and governments, and excluding financial-sector debt). In contrast, 14 countries have increased their total debt-to-GDP ratios by more than 50 percentage points.”

“Developing economies have accounted for 47% of all the growth in global debt since 2007—and three quarters of new debt in the household and corporate sectors.”

And on China specifically…

“Until recently, China’s unprecedented economic rise was not accompanied by a significant expansion in leverage. From 2000 to 2007, total debt grew only slightly faster than GDP, reaching 158% of GDP, a level in line with that of other developing economies. Since then, debt has risen rapidly. By the middle of 2014, China’s total debt had reached 282% of GDP, far exceeding the developing economy average and higher than some advanced economies, including Australia, the United States, Germany, and Canada. The Chinese economy has added $20.8 trillion of new debt since 2007, which represents more than one-third of global growth in debt. The largest driver of this growth has been borrowing by nonfinancial corporations, including property developers. At 125% of GDP, China now has one of the highest levels of corporate debt in the world. Throughout history and across countries, rapid growth in debt has often been followed by financial crises. The question today is whether China will avoid this path and reduce credit growth in time, without unduly harming economic growth.”

There are lots of ‘trillions’ above.  Here’s a reminder of what one is…. 1 million seconds is 12 days.  1 trillion seconds is 31,700 years, or pictorially…

Unbaking the GFC cake