Wednesday, 7 March 2012

Graph(s) of the week: Debt

This week I'll take a look at the cross country comparison of household, corporate and financial sector debt levels.

Figure 1. Household debt, % of GDP. Source: The Economist

Figure 2. Financial sector debt, % of GDP. Source: The Economist

Figure 3. Corporate (non-financial) private sector debt, as % of GDP.
Source: The Economist 

It is interesting to notice how the UK ranks top in household debt (almost a 100% of GDP) and financial sector debt (a staggering 220% of GDP), while coming (only) third in corporate debt (still over a 100% of GDP). The pre-crisis growth decade was obviously driven by debt accumulation in Britain painting an highly unsustainable picture of their economy. According to this, the UK could be in much worse shape than imagined. Its financial sector debt can partially be explained by the fact that a lot of financial institutions with London headquarters have global operations (as explained previously) so when they spread out the debt isn't that worrying. However, domestic companies and households were accumulating wealth on debt creation rather than value creation. The US paints a similar picture, with a lot of their household debt being tied up into mortgages. Easy obtainable credit and low interest rates sent distorted signals onto the market that encouraged private sector debt accumulation. This debt bubble had to burst eventually. 

Note: for Italy and Greece (not pictured), unsustainable government debt was the culprit. With government debt the story is a bit different since it cannot be so well hidden as household or corporate debt. It is much more sensitive to international investor sentiments and it is a signal that public finances need to be brought under control. This can be much harder to establish for other types of debt. 

5 comments:

  1. this is terrible.. What can the private sector do to fix this? I can only imagine massive lay-offs, big losses (both company losses and on mortgages), and years of destabilization uncertainty and low confidence.
    Does this mean the recession is far from over? Cause it all looks really gloom to me...

    ReplyDelete
    Replies
    1. from the British perspective mostly, but Europe nor the US aren't far behind this negative scenario..

      Delete
  2. you say that pre-crisis growth was driven on debt, but aren't these current debt levels? Didn't all these countries experience a big increase in debt after the crisis had already started, and mostly because of it?

    ReplyDelete
  3. It seems that the financial corporate sector debt was adjusted to remove foreign owned debt, so that actually is only the debt held domestically, which is amazingly high

    ReplyDelete
  4. @Charlie - it does indeed look gloom, but the private sector can and will eventually restructure with not necessarily big losses. For more on the corporate balance sheet restructuring, I recommend this good text.

    @anonymous - yes, they are, but they accumulated during the pre-crisis growth. As for the increase in debt after the crisis, you are referring to government debt, which isn't pictured here. Government debt did rise as a consequence of bailouts and higher deficits (less revenue from taxes due to failing housing and construction industries, and higher expenditures due to more unemployment benefits), but the private sector accumulated its debt mostly before the crisis.

    @John - that's true, thanks for pointing that out.

    ReplyDelete