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Debt and (not much) deleveraging
Susan Lund, McKinsey Global Institute Peterson Institute for International Economics
20 37 45 Financial
Global debt outstanding by type1 $ trillion, constant 2013 exchange rates
SOURCE: McKinsey Global Institute analysis
1 2Q14 data for advanced economies and China; 4Q13 data for other developing economies.
199
87
142
4Q00 4Q07 2Q141
Global debt has increased by $57 trillion since the crisis began – with $25 trillion increase in the private sector
26
38
56 Corporate
22
33
58 Government 19
33
40 Household
269 246 286
87
142
199
Total debt as % of GDP
Hidden time bomb?
Household debt
Household leverage outside the core crisis countries continues to grow
Household debt-to-income ratio, 2000–2Q14 %
SOURCE: McKinsey Global Institute analysis
0
25
50
75
100
125
150
175
200
225
250
275
300
325
2Q14
United Kingdom Spain United States
2000 07
Ireland
0
25
50
75
100
125
150
175
200
225
250
275
300
325
Netherlands
Thailand
Denmark
France
Norway
Australia
Finland
Malaysia South Korea
Sweden
2Q14 07 2000
Canada -33 -17
-13 -26
10
19 22
11
10
18
15
2 -5
Change in debt-to-income ratio, 2007–2Q14 Percentage points
XX
7
28
Changes in house prices are correlated with changes in household debt-to-income across countries
SOURCE: McKinsey Global Institute analysis
-30
-25
-20
-15
-10
-5
0
5
10
15
20
25
30
35
-45 -40 -35 -30 -25 -20 -15 -10 -5 0 5 10 15 20 25 30 35 40 45 50 55 60 65 70 75
Change in household debt to income 2007–13, Percentage points
Indonesia
Korea Thailand
Russia France
Poland China
Sweden
Italy
Germany
Netherlands
Canada
South Africa
Australia Finland
Japan
Malaysia
United States
Belgium
Change in house price 2007–13, %
Czech Republic
Singapore
United Kingdom
Ireland
Denmark
Spain
Norway
Advanced economies
Developing economies
Correlation coefficient = 60%
US states with the greatest increase in house prices before 2007 also saw the biggest rise in debt-to-income ratios
SOURCE: McKinsey Global Institute analysis
1 Household debt balances by state are estimated by the Federal Reserve Bank of New York based on the population with a credit report. We estimate household debt to disposable income by state using additional data from the US Census Bureau.
Household debt-to-income ratio1, %
107
112
91
116
106
56
87
8
30
20
2000-07, %
House price increase
110
105
76
83
74
78
74
68
New York
Illinois
Florida
Maryland
Arizona
102 Nevada
Kansas
Texas
Ohio
126 California
109
125
139
157
185
189
93
98
108
214 149
120
131
133
99
101
95
89
82
82
End-2013, %
Debt-to-income ratio
2000 2007
In Denmark, the wealthiest households had the largest increase in leverage - in contrast to the United States
Median debt-to-income ratio for indebted households by income percentile, %
SOURCE: Statistics Denmark microdata; US Survey of Consumer Finances microdata; McKinsey Global Institute analysis
Change in debt-to-income ratio, 2001–07 Percentage points
22 24 37 45 47 26 57 79 70 41 54 49
55 52 80
160 216 231
138 115 135 125 116 104
Income percentile
90–100 80 – 90 60 – 80 40 – 60 20 – 40 <20 90–100 80 – 90 60 – 80 40 – 60 20 – 40 <20
Denmark United States 280
263
205
117
74 79
157
196 194 192
140
178
Median debt-to-income ratio, 2013, %
82 81 127 216 277 156 155 172 171 197 151 292
2000
2007
7
In Denmark, the wealthiest households had the largest increase in leverage - in contrast to the United States
Median debt-to-income ratio for indebted households by income percentile, %
SOURCE: Statistics Denmark microdata; US Survey of Consumer Finances microdata; McKinsey Global Institute analysis
Change in debt-to-income ratio, 2001–07 Percentage points
22 24 37 45 47 26 57 79 70 41 54 49
55 52 80
160 216 231
138 115 135 125 116 104
Income percentile
90–100 80 – 90 60 – 80 40 – 60 20 – 40 <20 90–100 80 – 90 60 – 80 40 – 60 20 – 40 <20
Denmark United States 280
263
205
117
74 79
157
196 194 192
140
178
Median debt-to-income ratio, 2013, %
82 81 127 216 277 156 155 172 171 197 151 292
2000
2007
SOURCE: National sources; BIS; Eurosystem Household Finance and Consumption Survey; IMF; McKinsey Global Institute analysis
Country Netherlands South Korea Canada Sweden Denmark Norway Australia Malaysia Thailand Ireland Belgium Finland UK Spain Portugal China France Brazil Russia United States Germany Italy
Debt-to-income ratio, 2Q14, %
230 144 155 157 269 266 168 146 121 175 93
106 133 113 115 57 87 41 27 99 83 62
10 18 22 19 2 - 5 10 7
28 - 33 16 11 - 17 - 13 - 9 22 15 14 9
- 26 - 11
7
Debt servicing ratio, 2013, %
- 18 15 28 18 - 13 30 28 62 27 - 43 15 14 9
- 31 - 2 86 - 2
178 20 - 9 18 - 18
House price increase, 2007–2Q14, %
Household debt in seven countries appears most worrisome
Highest
Lowest Change in debt-to-
income ratio, 2007–2Q14, p.p.
23 22 8
15 24 19 26 44 19 20 22 10 16 25 21 8
18 22 20 10 13 10
Three risks to watch
China’s soaring
debt
China’s debt reached 282 percent of GDP in 2014, higher than debt levels in some advanced economies
SOURCE: McKinsey Global Institute analysis
NOTE: Numbers may not sum due to rounding.
Debt-to-GDP ratio, %
China
72
125
83
158
282
121
23
55
42
20
38
8
2007 2Q14 2000
24 65
7
Household Non-Corporate Government Financial
By country, 2Q14
55
80
125
69
67
54
60
38 65
61
36
70
25 Canada 247
Germany 258
United States 269
Australia 274
China 282
113 31
77 89
54
92 70
Nearly half of China’s debt is related to real estate
SOURCE: People’s Bank of China; National Audit Office; McKinsey Global Institute analysis
Real estate sector
Real estate -related sectors
Local govt. financing vehicles (LGFV)
Household mortgages
Other sectors
14
12
10
8
56 100% = $21.6 trillion
China’s real economy outstanding debt by sector, 2Q14 %
Local government debt has grown rapidly since 2007, linked to real estate and infrastructure
SOURCE: People’s Bank of China; National Audit Office; IMF; McKinsey Global Institute analysis
Outstanding balance of China’s government debt by source $ trillion, constant exchange rate, 2013
03 2001 2Q14
5.5
10 07
1.9
1 Local government financing vehicles.
0.1 Local government bonds
1.1 Other local government debt
1.7 LGFV bank loans1
2.6 Central government debt
0
1
2
3
4
5
6
40% of loans are repaid with
land sales
20% of new
loans are used to
repay old loans
53%
13%
30.0%
Shadow bank loans now accounts for 30 percent of outstanding Chinese debt
1 Excludes financial-sector debt. 2 Includes loans from world co-operatives, microcredit institutions, Internet peer-to-peer lending, and informal loans.
SOURCE: People’s Bank of China; National Bureau of Statistics of China; National Audit Office; BIS; CICC; Goldman Sachs; expert interviews; McKinsey Global Institute analysis
Banks
Corporate bonds
Government bonds
Total = $21.6 trillion
Composition of China’s debt, 2Q141 $ trillion
86
38
59
23
Credit growth 2007–2Q14 %
Shadow banking entities $ trillion
Entrusted loans
Wealth management products
2.4
0.8
1.6
1.7
Financing companies and other loans 2
Trust loans
6.5
Shadow bank loans2 30%
4%
China’s government could raise enough debt to recapitalize the financial system, even if half of property loans defaulted
SOURCE: People’s Bank of China; expert interviews; McKinsey Global Institute analysis
55
24
79
Current Debt 2Q-2014
Required increase to
cover losses
China
Government debt-to-GDP %
Assumptions: ▪ Default rate
– Property loans = 50% – Property related = 40%
▪ Recovery rate = 20%
101
Advanced economy average
Out of the shadows
Shadow banking
The financial sector in advanced economies has deleveraged since the crisis
Financial-sector debt (% of GDP) Index: 100 = 2000
SOURCE: McKinsey Global Institute analysis
NOTE: Debt as percent of GDP is indexed to 100 in 2000; numbers here are not actual figures.
183
362
117
93 102
218
374
128
36 62
70 97
Peak 2Q14
Financial sector debt-to-GDP, %
France
Germany
Netherlands
Japan
United States
United Kingdom
2Q14 4Q09 4Q07 80
100
120
140
160
180
200
4Q00
Shadow banking entities and instruments that were important before the crisis have declined
SOURCE: McKinsey Global Institute analysis
1 As of June 30, 2014.
2007 2014 1
8.7
1.0 0.4
2.7
5.1 6.4
58.2
4.3 7.9
1.9 4.6
19.5
0.3
Repos (Europe)
SIV ABCP Money market funds
CDO/CMO Repos United States
CDS
-29 -9 -33 -9 -70 -100 -67
Decrease since 2007, %
$ trillion
Non-bank sources are ~50% of private sector credit in advanced economies
SOURCE: McKinsey Global Institute analysis
1 United States, United Kingdom, Germany, France, Spain, Netherlands, Japan, South Korea, Canada, and Australia. 2 As of June 30, 2014.
Share of non-bank credit, %
Compound annual growth rate (%)
-0.4
5.8
0.2
-1.2
2007–10 2010–142
-2.5
5.8
2.2
3.4
50 53 53 53
2014 2010 2007 2000 2
Bank loans
Corporate bonds
Securitization
Non - bank loans
59
28
9
10
13 55
26
7
11
11
55
26
6
11
12
37
19
5 5 9
Outstanding debt in advanced economies1 $ trillion, constant exchange rates
1 Australia, Canada, France, Germany, Japan, Netherlands, South Korea, Spain, United Kingdom, United States. 2 As of June 30, 2014.
SOURCE: McKinsey Global Institute analysis
Since 2009, net new bank lending to corporates has been replaced by other sources
0.7 -0.5 Securitization
2.1 0.6 Non-bank loans
Change in corporate debt in 10 advanced economies1
$ trillion, constant exchange rates
20142
0.4
13
0.5
12
0.8
11
0.7
10
-0.2
09 -0.8
08
1.9
07
2.1
06
1.8
05
1.2
04
0.5
2004–08
Cumulative change $ trillion
2009–141
0.7 2.3 Corporate bonds
4.0 -0.8 Bank loans
0.2 0.1 0.2
-0.4
-1.0
0.9 1.2
0.8 0.7 0.4
0.1
Assets of credit funds have more than doubled since 2009
SOURCE: McKinsey Global Institute analysis
1 As of September 30, 2014; Sakaty as of July 1, 2014. 2 Includes $48 billion of assets of Apollo’s insurance subsidiary Athene. NOTE: Numbers may not sum due to rounding.
14
73
64
46
Structured credit
Direct lending
Distressed debt
209 Other2
Mezzanine
AUM of credit funds of 8 alternative asset managers , $ billion
17
15
28
13
25
20
5
44
Compound annual growth rate, 2009–141, % Types of credit, 20141
82
48
61
19
37
16 17 34
32 26
Ares
Carlyle Group KKR CVC
2014 1
406
108 Apollo
Oaktree
Sakaty
Blackstone
12
2009
178
64
10 13 6
Finding stability in an indebted world
Eight tools for boosting financial stability in an indebted world
Improve data collection and monitoring of debt 6
Create a healthy mix of bank and non-bank credit sources 7
Consider a broader range of tools for resolving sovereign debt 5
Promote healthy financial deepening in developing economies
8
Improve process for private sector debt restructuring 2
Use macroprudential tools to dampen credit cycles 3
Encourage innovation in mortgage contracts 1
Reduce tax incentives for debt 4
Thank you
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