Households and businesses are set to shed a lot more debt, according to research from the Bank for International Settlements. In a chapter of the latest quarterly review entitled Debt reduction after crises, Garry Tang and Christian Upper predict further mortgage write-downs and business deleveraging:
We find that a period of debt reduction followed 17 out of 20 systemic banking crises that were preceded by surges in credit. Debt/GDP ratios fell by an average of 38 percentage points, returning to approximately the levels seen before the increase. If history is any guide, we should expect to see a much more significant reduction in private sector debt, particularly of households, than has so far taken place after the recent crisis. [emphasis ours]
If 38 percentage points sounds like a lot, it is: it’s nearly a third of the current level. Consider the context:
US households increased their indebtedness from close to 100% of disposable income in 2000 to more than 130% in 2007. Similarly, over the same period, British and Spanish households raised their debt by approximately 60 percentage points to more than 160% and almost 130%, respectively, of disposable income.
So, how is the world doing on debt reduction? Well, the US has reduced its debt/GDP ratio by about 5 percentage points in the past three years (only 33 to go). In the UK, Spain and Ireland, falling debt has not outpaced shrinking GDP. Look at the blue lines Read more