The major findings of the report, based on the analysis of data from 50 countries, are: (1) Overall the UK registered the fastest leverage growth rate since 1990, catching up with Japan as the two countries with the highest leverage levels, with debt-to-gross domestic product (GDP) ratios over 450 percent. What is remarkable is that the total debt-to-GDP ratios of the BRICs (Brazil, Russia, India and China) are much lower than those of the 10 developed countries.
(2) Despite the deleveraging since the onset of the global financial crisis, in certain sectors in several countries, and not just in the US, the leverage levels are still very high, which is a global problem. (3) These unsustainable leverage levels globally, and not just in the US, could have been identified in the years prior to the onset of the crisis, using the right tools. More work is needed now to collect and analyze data for tracking leverages, at a granular level across countries and across time, using specific metrics such as leverage growth rates and the borrowers’ debt service abilities in cases of income disruptions and interest rate hikes. (4) The excessive leverage leading to the crisis was concentrated more in the financial sector than in either the corporate sector -- except for the commercial real-estate sector and companies acquired through leveraged buyouts -- or the government sectors. But even in the financial sector, the excessive leverage varied significantly across different financial institutions and countries, with the US broker dealers and some European banks in the most vulnerable position, especially due to securitized residential mortgages. (5) The financial sector average leverage was by the second quarter of 2009 already below the recent historical levels in most countries, with the banking system’s capital levels at or above the pre-crisis levels. (6) Ten sectors in five countries are identified with the highest potential for deleveraging. These are the household sectors in the UK, the US, Spain and to smaller degree in Canada and South Korea; the commercial real-estate sectors in the UK, the US and Spain; and the corporate sector and segments of the financial sector in Spain. (7) Major financial crises are almost always followed by long and painful deleveraging episodes, with an average duration of six to seven years, during which the debt-to-GDP ratio drops by 25 percent as real GDP contracts for the first two to three years of leveraging. (8) Based on the historical record, we should expect the continued deleveraging in specific sectors of several large economies -- countered somewhat by the rising leverage in the public sector as many governments continue their deficit spending, leading to heavier debt burdens -- to slow down GDP growth significantly.
(9) At the microeconomic level, the mostly belt-tightening deleveraging will mean tighter credit for businesses and households, leading to slower investment and consumption growth, especially away from luxury goods toward value-oriented goods. (The article “Global Household Leverage, House Prices, and Consumption,” in the Federal Reserve Bank of San Francisco’s Economic Letter, published a week ago, focuses on deleveraging in the household sector.)
So, although the global financial crisis is over, we are now facing the painful prospect of prolonged deleveraging, especially in developed countries, for years to come, which will be a serious drag on global economic growth. Let’s hope that we have learned some valuable lessons from this global financial crisis in mitigating if not preventing similar ones, as the partial compensation for our pains.
