The world is $199 trln in debt, and grow­ing

Financial Mirror (Cyprus) - - FRONT PAGE -

The world’s economies may have im­proved since the fi­nan­cial cri­sis, but now more than ever, the world is drown­ing in higher and higher debt. A new re­port from the McKin­sey Global In­sti­tute sug­gests that the world has added $57 trln in debt since the fi­nan­cial cri­sis. The firm pointed out that all ma­jor economies cur­rently have higher lev­els of bor­row­ing rel­a­tive to gross do­mes­tic prod­uct (GDP) ver­sus the year 2007, right be­fore the Great Re­ces­sion and fi­nan­cial cri­sis. The net global debt added since then is now pro­jected as a ra­tio of debt to GDP to be up 17 per­cent­age points.

The new to­tal of global debt, as of the end of the sec­ond quar­ter of 2014, is a whop­ping $199 trln. This mas­sive num­ber com­pares to $142 trln at the end of 2007, and it com­pares to a mere $87 trln at the end of 2000.

McKin­sey’s re­port high­lighted three ar­eas of emerg­ing risk that all of this new debt poses. First is the rise of gov­ern­ment debt, and sec­ond is the con­tin­ued rise in house­hold debt - and hous­ing prices - to new peaks in North­ern Europe and some Asian coun­tries. Third is the qua­dru­pling of China’s debt.

Be­fore you think that this bal­loon­ing debt ap­plies only to gov­ern­ments, it does not. This also ap­plies to house­holds, cor­po­ra­tions and fi­nan­cial-re­lated debt.

McKin­sey fur­ther warns that global

house­hold

debt

is reach­ing new peaks. It was only in na­tions like the U.S., the U.K., Ire­land and Spain where house­holds have ac­tu­ally delever­aged since the fi­nan­cial cri­sis. The to­tal house­hold debt in other na­tions, in­clud­ing the house­hold debt-to-in­come ra­tios, have con­tin­ued to rise. Th­ese na­tions with higher debt were said to in­clude na­tions such as Australia, Canada, Den­mark, Swe­den, the Nether­lands, Malaysia, South Korea and Thai­land.

Gov­ern­ment debt has grown by $25 trln in seven years and the re­search warns “to re­duce gov­ern­ment debt, coun­tries may need to con­sider new ap­proaches, such as more ex­ten­sive as­set sales, one-time taxes on wealth, and more ef­fi­cient debtrestruc­tur­ing pro­gramme.”

Glob­ally, the scari­est fig­ure by far has to be that China’s debt has quadru­pled since 2007. This was driven by real es­tate and shadow bank­ing, up to 282% of GDP. If you want to put this in per­spec­tive, this fig­ure is larger than the United States or Ger­many.

McKin­sey’s three warn­ings on China are as fol­lows: half of all loans are some­how linked to China’s over­heated real-es­tate mar­ket; un­reg­u­lated shadow bank­ing ac­counts for nearly half of new lend­ing; and the debt of many lo­cal gov­ern­ments is prob­a­bly un­sus­tain­able. The only good news is that China’s gov­ern­ment is be­lieved to have the ca­pac­ity to bail out the fi­nan­cial sec­tor if a prop­erty-re­lated debt cri­sis de­vel­ops. But in terms of to­tal debt to GDP for some of the ma­jor na­tions, that debt in­cludes gov­ern­ment, fi­nan­cial in­sti­tu­tions, cor­po­rate (non-fi­nan­cial) and house­holds.

Any­how, ar­gu­ments of this sort can carry on for­ever. It is ul­ti­mately hard to know how the un­wind­ing of all this debt will oc­cur. Four paths to begin gov­ern­ment debt delever­ag­ing were iden­ti­fied as fol­lows: make fis­cal ad­just­ments to re­duce or elim­i­nate fis­cal deficits, ac­cel­er­ate GDP growth through pro­duc­tiv­ity im­prove­ments, raise in­fla­tion tar­gets or re­struc­ture debt.

If the global debt load is still grow­ing, and if the $199 trln debt was as of the sec­ond quar­ter of 2014, then the global debt load by now is re­ally over $200 trln. Food for thought.

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