The debt dragon: A monster is rearing its ugly head in China and it is called debt. Whether government, corporate, or even household, it is all on the rise, shooting up from 130 per cent of economic output in 2008, to 200 per cent today.

What would you like to know about China’s debt addiction and its implications for the country and world economy? How did it get so big? Who are the culprits? How much worse could it get? The FT will tackle the Chinese credit habit in a three-part series starting on Tuesday. If you have questions on the subject, simply post them in the comment box below – along with your name or pseudonym – and I will ask a selection of them to the author of the series Simon Rabinovitch, China correspondent, in a podcast on Wednesday.

Irish central bank governor Patrick Honohan writes:

The focus should be increasingly on measures that can help unblock growth. One dimension which, in my personal view, has not yet received the attention it deserves is the potential for mutually beneficial risk-sharing mechanisms. A variety of financial engineering options could be considered going beyond the plain vanilla bonds currently employed. Read more

James Politi

The US is little more than $200bn away – or about 2 months – away from reaching its congressionally mandated national debt limit of $14,300bn.

The need to increase it to avoid a potentially disastrous US default is the next fiscal battleground in Washington, after the lawmakers stop squabbling over a government shutdown.

Republicans want to use the opportunity to push for more spending cuts, while Democrats say this is not the place to negotiate.

On Thursday, Moody’s Investors Service offered its analysis of the likelihood that a major crisis will ensue, threatening America’s triple-A credit rating much earlier than even the most ardent fiscal hawks would imagine. Read more

August saw a large reduction in debt repayments by individuals and businesses in the UK, which caused net lending figures to rise, according to the Bank of England. This is likely to be temporary, as further data suggest net lending declined again in September.

Net lending to businesses in August increased for the first time since February – by £0.3bn. This number – the difference between gross lending and repayments to lenders – reflects repayments falling more quickly than gross lending, which also fell on a quarterly basis. Businesses have been keen to repay their debt – to reduce leverage, perhaps, or to reduce the debt stock that will need refinancing for smaller businesses.

A similar picture is painted for secured lending to individuals. Net lending in August rose significantly – by £1.7bn – but other data suggest the net flows fell again in September. Again, the net figure does not suggest an increase in lending: gross lending remains broadly unchanged and even fell slightly, but repayments increased. Indeed, “household demand for secured lending for house purchase was reported to have fallen unexpectedly in 2010 Q3, according to the Credit Conditions Survey, though demand for buy-to-let investments rose slightly for the first time since 2008 Q3.” Read more

All eyes on tomorrow’s €1.5bn Irish bond offering. As investors have become more nervous, the head of the central bank has called on the government to rethink some of its austerity plans:

“I think these kinds of budgetary programmes do need to be reprogrammed in the light of circumstances,” Patrick Honohan told an audience today at a regulatory conference in Dublin. Read more

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

Authorities wanting to kick-start the economy using debt, take note: Russian shareholders dislike debt-financing, unlike their developed market peers. This is the implication of research from the Finnish central bank, which seeks to explain low levels of debt-financing in Russian companies.

The research considered company stock performance on days when the company announced debt financing. Most research on this subject has considered developed markets only; typically, these stocks respond positively to such announcements. Debt financing confers tax benefits – and also removes the need for potentially dilutive equity issuance.

Russian stockholders react in an equal and opposite way, however. Controlling for normal movements of the stock market index (RTS), the study finds that Russian company stocks fall by roughly the same amount that Western stocks rise, when a debt announcement is made. Why the debt-aversion? The authors point to perceptions of risky behaviour associated with taking extra debt, and recommend improved corporate governance: Read more

James Politi

David Levy, chairman of the Jerome Levy Forecasting Center, based in the northern suburbs of New York, is described on his website as the world’s foremost expert in applying the “profits perspective” to economic analysis.

It’s not entirely clear to me what that means, but he claims to have a reasonably good track record.

His latest report, released today, seeks to dismantle the argument being made by many US economists and politicians – as well as the Federal Reserve – that the US budget deficit needs to be kept under control and ushered towards a more sustainable path.

Calling it “sovereign debt hysteria”, he proceeds to offer several reasons why mounting debt won’t be a problem for the US economy, even if it rises much higher than its current level of 62 per cent of gross domestic product. Below are his key points:  Read more

Are Bulgaria and Luxembourg unsung heroes of the global recession? Estonia has received wide praise for its fiscal position, and Poland’s economy is likewise admired for its refusal to contract. But this useful graphic from the Economist shows two additional players for the fiscal saints.

Public debt in Bulgaria and Luxembourg is between 0 and 19 per cent of GDP – a distinction shared only with Estonia. Both countries also share low deficits, as proportions of their GDP. But unlike Estonia, Bulgaria and Luxembourg enjoy below-average unemployment rates: 9.7 and 5.2 per cent respectively, compared to 19 per cent for Estonia. Read more

Simone Baribeau

Moody’s just slashed Greece’s rating to Ba1 from A3, a whopping four notches, bringing the ratings agency in line with its peers and the country’s debt squarely into junk territory. Moody’s, along with Standard and Poor’s and Fitch, had already downgraded the debt-laden nation in April, but by fewer notches.

From the release:

Moody’s Investors Service has today downgraded Greece’s government bond ratings by four notches to Ba1 from A3, reflecting its view of the country’s medium-term credit fundamentals.
Today’s rating action concludes the review for possible downgrade, which Moody’s initiated on 22 April 2010. Moody’s has also downgraded Greece’s short-term issuer rating to Not-Prime from Prime-1. Greece’s country ceilings for bonds and bank deposits are unaffected by the review and remain at Aaa (in line with the Eurozone’s rating). The outlook on all ratings is stable.

 Read more

Ralph Atkins


The eurozone’s financial sector and economy are facing “hazardous contagion” effects from the region’s debt crisis, according to the European Central Bank, which has also predicted another €195bn in bank writedowns this year and next. Read more

A major difference between mainstream and Islamic debt looks set to be removed. There will be significant winners and losers – consumers and investors, respectively – but also, possibly, a structural shift within debt markets.

Malaysia’s central bank is drafting rules to regulate the use of ibra*, Islamic rebate, which will affect $95bn Islamic finance assets (a fifth of total banking assets or roughly half of GDP).

In Western banking, someone taking a loan is liable for the principal and the interest as it is accrued. If the loan ends early – through default or early payment – that person is typically liable for the interest accrued to date.

Not so in Islamic financing. Read more

Simone Baribeau

Household debt continued to contract last quarter, falling at an annual rate of 1.25 per cent according to the Federal Reserve’s flow of funds data released today. It’s the seventh consecutive quarterly decline, but its slowest since the fourth quarter of 2008. As has been the case, the falls have been split between home mortgage debt, which fell at an annual rate of 0.75 per cent, significantly slower than the last two quarters, and credit card debt, which fell at 5.75 per cent, significantly faster.

So does this mean that US consumers are buckling down and, despite job losses and declining household wealth, paying down their credit cards?

Probably not, according to a recent credit card debt study from Card Hub. (h/t Felix SalmonRead more

Simone Baribeau

Panama was one step closer on Friday to receiving a coveted investment grade rating on its sovereign bonds. Moody’s, one of the three main ratings agencies, put the Central American country’s key ratings on review for an upgrade. The group currently rates Panama’s Ba1 foreign currency government bond rating at one notch below investment grade.

The move follows a similar action by Standard & Poor’s, which upgraded its BB+ outlook on Panama from stable to positive in November. Read more

Zimbabwe’s central bank owes mining companies “a substantial sum of money” that it is unable to repay at the moment, the Mines Minister says. Zimbabwe “empathises with the mining companies and feels obliged to make good,” Obert Mpofu said at a presentation in Cape Town today. (from Bloomberg)

The debate on the eurozone was predictably full of waffle and empty rhetoric. The audience wanted answers to the financing problems of Greece, the economic woes of Spain, and the disaster that has been Latvia, countries that were each represented by their prime ministers. Answers to the genuinely difficult questions over the eurozone’s future, raised by Martin Wolf among others were not to be found.

Instead there was talk by George Papandreou, the Greek prime minister blaming speculators with “ulterior motives” for the high cost of financing his country’s debt. Read more

Standard Poor’s ratings agency cut its outlook on Japan’s AA long-term sovereign debt rating to negative from stable, citing reduced wiggle room on fiscal policy and voicing disappointment with the government’s budget
consolidation plans. The yen fell sharply against the dollar and the euro, although analysts said they expected financial markets to take the news in their stride (from Reuters).

The European Union’s new member states should not rely on foreign currency lending in the belief they will join the euro currency soon, says ECB Governing Council member Ewald Nowotny: they should instead create markets in local currencies and wean themselves off lending in euros or Swiss francs. Mr Nowotny told Reuters: “I think the mistake in some of these countries was the idea that they would join the euro soon and therefore did not care about creating these markets.”

The financial crisis has delayed euro adoption plans. With Estonia seen as next in line Read more

Argentina seems determined not to repeat the default of 2001. Economy minister Amado Boudou has said $6.6bn of the central bank’s international reserves will be placed into a fund this month, to help the government pay bondholders and international lenders for debts. The fund will cover about half of $13bn interest and principal payments due in 2010. The government said today it will give the central bank 10-year dollar-denominated notes, known as Letes, in exchange for the funds. Read more

Simone Baribeau

Total US non-financial debt rose at an annualised 2.8 per cent last quarter, putting the US on track for its smallest yearly increase since records began in 1976, according to the flow of funds report released by the Federal Reserve.

Federal debt ballooned 20.6 per cent, off its high of 39.2 per cent in the third quarter of 2008, but still well above its 2007 level of 4.9 per cent. State and local government debt grew as well, but at 5.1 per cent it increased at its slowest pace since the end of 2007. Read more