Three years ago, the McKinsey Global Institute released a massive research report called Debt and (not much) Deleveraging.
It reviewed the global debt situation and where it might be taking us. The answers were not pleasant.
In the report, there’s this fascinating graphic summing up the world debt situation as of mid-2014.
Source: McKinsey Global Institute
From the Great Recession’s beginning through Q2 2014, global debt grew $57 trillion to $199T. (From here on, I will use capital T to denote trillions, since we must use the word distressingly often).
That includes household, corporate, government, and financial debt. It does not include unfunded liabilities.
That’s a big problem that no politician dares to address in public.
It’s Not All the Fed’s Fault
McKinsey calculated that from 2007–2014, world debt levels grew at a 5.3% compound annual growth rate. That was slower than the previous seven years but still considerably faster than the world economy grew. Hence, debt as a share of world GDP rose to 286%.
Not all the debt categories grew equally. Government debt grew far faster than household, corporate, or financial debt. Household debt growth fell to a relative crawl, from 8.5% annual growth in 2000–2007 to only 2.8% in 2007–2014.
Which makes sense because families had little choice but to deleverage, often via bankruptcy.
Government and corporate borrowers faced no such pressure. Their debt kept growing at a slightly higher pace after the recession. Yes, some corporations hunkered down and rebuilt their balance sheets. Most did not. They kept borrowing and lenders kept lending, encouraged by central bank-generated liquidity.
This is an important point. We talk a lot about profligate governments running up debt, and rightly so, but they are not alone.
Businesses are equally and sometimes more addicted to debt. That would be fine and even positive if it were funding innovation and new production. But much of this new corporate debt paid instead for share buybacks that reduce equity, leaving the corporation more leveraged.
That seems to be what shareholders want. They should beware what they wish for.
Debt Growth Is Accelerating
As far as I know, McKinsey has not updated that 2015 report, but we can get similar data from the Institute for International Finance’s Global Debt Monitor.
Source: IIF
The totals aren’t the same as McKinsey showed for those years, so I suspect they have different data sources. They’re close enough for our purposes, though.
Adding together the same-colored bars, we get these global debt totals:
- 1997: $74T
- 2007: $167T
- 2016: $216T
- 2017: $238T
If those are accurate and my math is right, global debt grew at an 8.5% compound rate from 1997 to 2007. Then it slowed to 3.6% from 2007 through 2017. That’s good. We went on a worldwide debt diet.
But last year, we appear to have binged because debt grew 10.2% from 2016 to 2017. Breaking it down by sector, non-financial corporate debt grew 11.1%, government debt grew 6.7%, household debt grew 12.5%, and financial sector debt grew 11.3%, all in calendar 2017.
Looking only at 2017, government debt seems to be the least of our problems. The biggest debt growth was everywhere else. But why did it suddenly accelerate last year? In part, because the world economy grew enough to let global debt-to-GDP ratios fall slightly.
Here’s another IIF chart showing global debt as a percentage of GDP for both “mature” (what they call developed countries) and emerging markets:
Source: IIF
Growing Trouble in Emerging Markets
The developed world is far more leveraged than the EM world, but EM countries are no pikers at 210%. They often lack the stabilizing resources developed countries possess, too.
IIF points to Argentina, Nigeria, Turkey, and China for the largest debt ratio increases last year. But many emerging businesses borrowed money in dollars when the dollar was weak and the interest rates were low.
Further, our yield-hungry investors, both as individuals and institutions, were more than willing to lend to them to get something more than 1–2% that they could from sovereign bonds.
This level of emerging market debt is unsustainable because, among other reasons, debt matures and must be either repaid or refinanced. Here’s emerging market debt by maturity:
Source: IIF
Some $4.8T in emerging market debt matures from this year through 2020, much of which will need to be rolled over at generally higher rates and, if USD strength continues, in a disadvantageous currency environment.
Will that be possible? I don’t know, but we’re going to find out—possibly the hard way.
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