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.