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After the 2008‒09 financial crisis there was a lot of tough talk
about reducing global debt levels. Unfortunately, during the past
decade, debt levels have continued to rise steadily: from 2008 to
2018, debt levels rose to $250 trillion—an increase of roughly
43%. While slower than in the prior decade, debt growth was faster
than GDP growth, and the ratio of debt to GDP rose from around 280%
in 2008 to 320% in 2018.
Household and student loan debt
While the surge in household debt was one of the causes of the
global financial crisis, this threat has since abated. Since 2008,
the largest household sector deleveraging has occurred in the
United States, the United Kingdom, Ireland, Portugal, Spain, and
Germany. In other economies, such as Australia, Canada, Norway,
Sweden, Finland, France, and South Korea, household debt ratios
have continued to rise.
In the US, the rapid rise in student loans is a troubling
counter-trend. According to data from the Federal Reserve Bank of
New York, student debt is around $1.5 trillion, 11% of total
household debt (compared with 67% for mortgages). These loans have
grown by more than 180% since early 2007 (compared with only 8% for
mortgages), and the delinquency rate of student loans is about 10
times higher than that for mortgages. While this type of debt does
not pose the immediate systemic threat that mortgages did before
the global financial crisis, it is causing substantial financial
hardship for young college graduates and may be hurting market for
first-time homebuyers.
Corporate debt
While banks around the world are in generally better shape now
than before the crisis, overall financial-sector risk has not
fallen, it has migrated to under-regulated, nonbank financial
institutions which continue to lend large amounts to nonfinancial
corporations (NFCs). Arguably, the darkest spot in the post-crisis
private-sector debt picture is the rapid rise in NFC liabilities,
which increased nearly three-fold in the past decade. In the
developed world, the annual growth rate has been around 8% while
China's growth rate of corporate debt has been an eye-watering 40%
per year. How China continues to deal with its huge corporate debt
load is one of the imponderables facing the global economy: a
well-managed deleveraging will help to engineer a smooth trajectory
for the world's second-largest economy while a badly managed
deleveraging could create enormous volatility in financial markets
and damage growth prospects in many parts of the world.
US corporate debt has not risen as rapidly as China's—the
NFC-debt-to-GDP ratio has risen from 40% to 46% (to around $9
trillion) in the past decade. Nevertheless, there is growing
concern that this ratio is at a record high. There are also worries
about the recent flood of "leveraged lending," syndicated loans to
highly indebted companies (which have doubled in the past decade to
around $1.2 trillion); and collateralized loan obligations (CLOs),
packaged loans that are sliced and sold according to the risk
appetite of investors. The biggest concern is that the most rapid
increases in these types of corporate debt are concentrated among
the riskiest firms, while credit standards have been deteriorating.
Nevertheless, in an ultra-low interest-rate environment, the
current volume of CLOs is probably not a systemic threat to global
financial markets or the world economy. Once interest rates begin
to rise, however, the risks of another meltdown will increase.
Government debt
The net-debt ratio has stabilized in most developed economies
over the past half-decade. This is not the case in the US, where
debt held by the public as a percent of GDP rose from 39% in 2008
to 73% in 2014, and thanks to large fiscal stimulus put in place in
early 2018, the US net-debt ratio is set to soar to 95% by 2029 and
103% by 2039.
For some mainstream economists, the US debt burden is not a
source of concern, so long as the trend growth in nominal GDP (3.5%
to 4.5%) exceeds long-term government borrowing costs (currently
around 2.5%). But even with these benign trends, US government
interest costs are likely to increase very rapidly, overshadowing
other spending categories in the next couple of decades—and
would rise even faster if long-term rates were to return to their
early 2000s average of 4.0% to 5.0%. Moreover, with an aging
population, the growth in the entitlement programs (especially
Social Security and Medicare) will be more rapid than the growth in
nominal GDP, putting significant upward pressure on the US debt
ratio.
Posted 28 May 2019 by Nariman Behravesh, Ph.D., Senior Economic Adviser, IHS Markit
