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 >>
Europe’s new system of financial supervision maybe taking shape, but there are still gaping holes – and it is distinctly possible that policymakers will stumble into them. That was the, rather sobering, message of Athanasios Orphanides, Cyprus’s central bank governor, in a speech just delivered in Bratislava.
It is worth paying attention to what he had to say. Mr Orphanides, who learnt the ropes of central banking at the US Federal Reserve, is one of the smarter economists on the European Central Bank’s 22-strong governing council. That gives him greater status than perhaps a central banker from a Mediterranean island would usually command.
The European Union is close to an agreement on setting up new pan-European regulatory authorities and a “systemic risk” council headed by the ECB’s president. But Mr Orphanides suggested the emphasis had been put on preventive measures – and not enough on how to clear up the mess when financial institutions run into trouble. Read more >>
A spokesman for the Afghan central bank has dismissed reports of a $200m loan to troubled Kabul Bank but said it stands ready to provide bail out loans if necessary.
Emal Ashore told AFP: “As the biggest loan-providing institution we, the Central Bank, are ready to provide loans to the Kabul Bank.” Afghanistan’s finance minister and the governor of the Central Bank were due to hold a press conference later on Monday to “make some key announcements”, he said. Read more >>