AMSTERDAM: Global debt has risen $57tn or 17% of world GDP since 2007 and rather than reducing indebtedness, or deleveraging, all major economies today have higher levels of borrowing relative to economic output than they did in the year of the outbreak of the subprime mortgage crisis and the global credit crunch.
McKinsey Global Institute says in the third report in a series on debt and deleveraging, that expectations that the worst recessions since the Great Depression of the 1930s, would spur widespread “deleveraging” to safer levels of indebtedness were misplaced. The report calls for “fresh approaches” to preventing future debt crises.
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OECD data show that real world GDP growth is up 121% since the end of 2007 and the 17% rise in debt since the crisis This is not compares with a 23-point increase in the seven years before the crisis.
China’s debt has quadrupled since 2007. Fueled by property and shadow banking, China’s total debt has nearly quadrupled, rising to $28tn by mid-2014, from $7tn in 2007. At 282% of GDP, China’s debt as a share of GDP, while manageable, is larger than that of the United States or Germany.
MGI says that as it appears, economies need ever-larger amounts of debt to grow, and deleveraging is rare and increasingly difficult, they may also need to learn to live more safely with high debt. That will require new approaches to manage and monitor it, to reduce the risk of crises, and to resolve private-sector defaults efficiently. Policy makers will need to consider more ways to reduce government debt, and it may be time to reevaluate how incentives in the tax system encourage the amassing of debt.
