FT/McKinsey - Total UK debt 2nd Highest

Generali

An interesting report has been released by consultancy McKinsey:

http://www.mckinsey.com/mgi/reports/freepass_pdfs/debt_and_deleveraging/debt_and_deleveraging_full_report.pdf

These are the most pertinent points from the summary they provide:

• Empirically, a long period of deleveraging nearly always follows a major financial crisis.
• Deleveraging episodes are painful, lasting six to seven years on average and reducing the ratio of debt to GDP by 25 percent. GDP typically contracts during the first several years and then recovers.

As the whole thing is 94 pages long, it might be better to read the article about it in the FT:

http://www.ft.com/cms/s/0/99b57662-012d-11df-8c54-00144feabdc0.html

Which country experienced the biggest jump in debt, relative to gross domestic product, over the past decade?



A year ago, as the world reeled from the subprime mortgage crisis, most investors might have said America. And these days, countries such as Iceland, Dubai or Greece tend to spring to mind, in connection with deadly debt burdens.

However, if McKinsey consultants are to be believed, the real leverage giant – at least among the big western economies – is actually the UK. After crunching the data, McKinsey estimates that the gross level of British private and public debt is now 449 per cent of GDP – up from 350 per cent at the start of the decade...[continues]

Generali's translation service says:

Basically their argument boils down to the idea that in some countries (the UK, US and Spain chiefly) have had consumers, business and Governments borrow 'too much'.

Then there are countries where only one or two of the sectors have borrowed big (for example, France, Germany and Japan have massive Government debt, South Korea and Canada have big Corporate debts).

Finally there are one or two countries where no sector borrowed too much.

Some of this money will have to start to be repaid to allow the economy to function in a normal way again as the burden of the debt is too much to bear. In countries where all three sectors are heavily burdened with debt, getting back to a normal position is likely to be long and painful.

Many Governments (especially the UK's) has delayed properly addressing the issue by shifting the debt from the private to public sectors. This has delayed rather than solving the problem.

Edale

It would be interesting if you also included unfunded liabilities that aren't classed as debt such as the public sector pension deficit of around £1 trillion. I don't know if other countries have this problem though.

Generali

Edale wrote: »

It would be interesting if you also included unfunded liabilities that aren't classed as debt such as the public sector pension deficit of around £1 trillion. I don't know if other countries have this problem though.

I think if you include unfunded liabilities, Europe (inc the UK) and the US would be in a far worse position. Those that wouldn't include Aus who set up the Future Fund which is partially funded to pay future pension liabilities with the aim to be fully funded within 10 years I think and many poorer countries without any significant public pension scheme.

Old_Slaphead

And then there's 'off Balance Sheet' PFI liabilities coming in at another £300bn

michaels

Surely looking only at liabilities is some what one sided - if all that debt has been used to purchase real assets that have increased in value and are liquid then it would be a good thing - I am not saying it is the case but for example if the UK had collectively purchased 100% of GDP of gold when it was cheaper and could unload it at peak that would surely not be a problem?

Generali

michaels wrote: »

Surely looking only at liabilities is some what one sided - if all that debt has been used to purchase real assets that have increased in value and are liquid then it would be a good thing - I am not saying it is the case but for example if the UK had collectively purchased 100% of GDP of gold when it was cheaper and could unload it at peak that would surely not be a problem?

That's a good point.

The numbers aren't nominal, they're equated to GDP, the countries' output which should adjust for the underlying asset base as generally speaking, GDP runs with assets pretty much fully employed and the value of all assets on average should equate to the output that can result from their ownership and use.

bernard_shaw

Butbutbutbut... house prices are really high, the recession is over and everything's back to normal. So this report must be wrong.

Seriously though, I also saw this study reported in The Economist with this handy graphic.

[The study] finds 32 examples of sustained deleveraging (at least three consecutive years in which ratios of total debt to GDP fell by at least 10%) in the aftermath of a financial crisis. In some cases the debt burden was reduced by default. In others it was inflated away. But in about half the cases—which the report regards as the most appropriate points of comparison—the deleveraging came through a prolonged period of belt-tightening, where credit grew more slowly than output. The message from these episodes is sobering. Typically deleveraging began about two years after the beginning of the financial crisis and lasted for six to seven years. In almost every case output shrank for the first two or three years of the process. (Countries which defaulted or inflated their debt away saw bigger recessions at first, but had higher output growth than the belt-tighteners by the end.)

Worse, there are several reasons why today’s mess could be more protracted than previous episodes. First, the scale of indebtedness is higher. The highest debt ratio in the report’s group of belt-tighteners was 286%, in Britain after the second world war. Today more than half the rich countries in the McKinsey sample have debt totalling more than 300% of GDP. Second, the number of countries afflicted simultaneously means that rapid expansions of exports, which have supported output in the past, are harder to achieve. Third, big increases in public debt, while cushioning demand in the short term, increase the overall debt reduction that will eventually be needed. Once private deleveraging is done, the public sector will need to cut back.

Butbutbutbutbut.......

Generali

Yeah, that's the same report.

So according to the study if the UK is going to see deleveraging happen, there should be signs of it. So are there?

Well M4 is rising pretty slowly despite all the QE - tentative signs of deleveraging perhaps. Net mortgage lending is up by £1,500,000,000 so probably no signs there. However, the last figures for consumer lending (3rd quarter of 2009) show gross lending down 12.7% and unsecured lending down 39% on the year. (link)

bernard_shaw

Generali wrote: »

Yeah, that's the same report.

So according to the study if the UK is going to see deleveraging happen, there should be signs of it. So are there?

Well M4 is rising pretty slowly despite all the QE - tentative signs of deleveraging perhaps. Net mortgage lending is up by £1,500,000,000 so probably no signs there. However, the last figures for consumer lending (3rd quarter of 2009) show gross lending down 12.7% and unsecured lending down 39% on the year. (link)

Popcorn time.

Radiantsoul

The UK has grown pretty rapidly when it comes to building up all this debt. So whilst the deleveraging might be costly(if it happens) there is still the question of whether it is a price worth paying.

ossian

Radiantsoul wrote: »

The UK has grown pretty rapidly when it comes to building up all this debt. So whilst the deleveraging might be costly(if it happens) there is still the question of whether it is a price worth paying.

Oh it is clearly a price worth paying otherwise you do what Japan has done and the worst effects of that are yet to come. No thank you.

The real trick is getting the pace of deleveraging right. The Tories, if they do what they say, are likely to turn a crisis into a disaster. Fortunately you can't believe a word and they'll probably mess up in the same way labour will and that's by failing to do anything. Ultimately we need to slowly reduce public spending, repay borrowing, and tackle public sector pensions but do it too fast and the economy goes into reverse and we enter the double dip. QE will need to be phased out as growth returns. Too fast and urgh it's too horrible for words. The Tories talk like they don't get this I hope they do.