Sunday, June 27, 2010

Global debt situation

The Economist has a survey on the global debt situation that threatens to seriously imperil the global economic growth prospects for many years to come and demands radical changes from the way consumers, businesses, financial institutions and governments have behaved over the past few decades. It writes,

"(F)or the developed world, the debt-financed model has reached its limit. Most of the options for dealing with the debt overhang are unpalatable... The battle between borrowers and creditors may be the defining struggle of the next generation."

An interactive graphic, based on a survey by the McKinsey Global Institute, gives the details on the debt situation at 14 major countries with the respective shares of government, household, financial and non-financial corporate sectors.

The average total debt (private and public sector combined) in ten mature economies rose from 200% of GDP in 1995 to 300% in 2008, with even more startling rises in Iceland and Ireland, where debt-to-GDP ratios reached 1,200% and 700% respectively.

Interestingly, the aforementioned graphic has an encouraging picture of India, putting its fiscal position in the right perspective. Though it stands in the middle with its 70% public debt, it has the lowest share of household and financial sector debt and the third lowest share of non-financial sector debt. And as I have written earlier here, here, and here, even this 70% of GDP public debt is cushioned by the fact that more than 90% of its is domestically owed and the debt to exports ratio is close to its lowest in more than 75 years.

This graphic ranks countries in terms of their primary budget balance, debt-to-GDP ratios plus the relationship between the yield on their debt and economic growth (if the former is larger than the latter, the debt burden is getting steadily worse).

The expansion in the role of government over the past three decades, which was financed through borrowings and surging tax revenues is now showing signs of stress as the receession takes its toll on tax revenues. The debt-to-GDP ratio of the G7 group of nations is at its highest level for 60 years

Read the survey to explore the debate on debt burdens unsettling market confidence and upsetting the voters, how bankruptcy law has changed in favour of the corporate debtor (driven by the provisions of the Chapter 11 Bankruptcy law in the US which allows companies to continue operating and prevents creditors from foreclosing on the business), the unsustainable household consumption binge, corporate sector's appetite for debt, role of rating agencies.

See also interactive graphics on the interconnected web of Eurozone debt, the country-wide status of debt, and the macroeconomic situation of the EU economies.

Update 1 (15/5/2011)

The IMF staff has this nice video on public debt, which uses data from 174 countries over a period of 120 years, and will help policymakers understand the past and chart a future course to sustainable economic growth.

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