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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 %


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


-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


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


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


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


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


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.


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


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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presentation: debt and (not much) deleveraging › publications › papers ›...

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