Tag Archives: public sector

Remember deleveraging?

There is a lot of interesting stuff in the latest IMF Financial Stability Report. After much research on global debts levels (as per this post in 2014 and this one in 2015) over the past few years, the graph below on G20 gross debt levels from the IMF shows how little progress has been made.

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When looked at by advanced economy, the trend in gross debt from 2006 to 2016 looks startling, particularly for government debt.

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As the IMF state, “one lesson from the global financial crisis is that excessive debt that creates debt servicing problems can lead to financial strains” and “another lesson is that gross liabilities matter”.

The question does arise as to the economic impact of these debt levels if interest rates start to rise across advanced economies?

Delirious Deleveraging

Michael Lewis, in his 2011 book “Boomerang” on the consequences of the financial crisis, said that “leverage buys you a glimpse of a prosperity you haven’t earned”. Well, if that is true, we are all in trouble based upon the findings from the fascinating Geneva report “Deleveraging? What Deleveraging?” from Luigi Buttiglione, Philip Lane, Lucrezia Reichlin and Vincent Reinhart, published yesterday.

The report paints a stark picture, as the following statements illustrate:

“Contrary to widely held beliefs, the world has not yet begun to delever and the global debt-to-GDP is still growing, breaking new highs. At the same time, in a poisonous combination, world growth and inflation are also lower than previously expected, also – though not only – as a legacy of the past crisis. Deleveraging and slower nominal growth are in many cases interacting in a vicious loop, with the latter making the deleveraging process harder and the former exacerbating the economic slowdown. Moreover, the global capacity to take on debt has been reduced through the combination of slower expansion in real output and lower inflation.”

The report has a number of attention grabbing graphs on debt levels as a % of GDP like the one below on the US and others on Europe, China and global debt levels, as below.

click to enlargeUS Debt as % of GDP

click to enlargeDebt as % of GDP

The report is particularly pessimistic about China’s medium term prospects after its rapid 72% rise in debt levels since the crisis. On the US and the UK, for the countries who “managed the trade-off between deleveraging policies and output costs better so far, by avoiding a credit crunch while achieving a meaningful reduction of debt exposure of the private sector and the financial system” the legacy of “a substantial re-leveraging of the public sector, including the central banks” leaves a considerable challenge for the future.