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McKinsey report on Deleveraging

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Excessive debt is a drag on growth - look no further than Greece to see the consequences. Two years ago I read an insightful McKinsey report on deleveraging (which is a fancy word for the process of paying back what you owe), and I was pleased to see that they've recently done an update on it. Along with Deutsche Bank's Long-Term Asset Return Study, I think this was a top report on the deleveraging processes the world is going through. Here's the highlights as I saw them (bear in mind that McKinsey write from a developed world point of view).

Debt:GDP ratio has grown

"Overall, the deleveraging process has only just begun. During the past 2.5 years the ratio of debt to GDP, driven by rising government debt, has actually grown in the aggregate in the world's 10 largest developed economies...Private-sector debt has fallen, however, which is in line with historical experience: overextended households & corporations typically lead the deleveraging process; governments begin to reduce their debts later, once they have supported the economy into recovery."

United States

Household debt:disposable income fell by some 11% from 1 Jan 2009 to 30 June 2011, with defaults counting for some 70% of the reduction in mortgage debt, & 80% of the reduction in consumer credit. In the US it's easier to default on property than in many other countries, as in most states lenders are not allowed to pursue the other assets or income of borrowers who default.

At the current rate of deleveraging US household debt:disposable income would return to the historical trendline by mid-2013 (Ed: the big question is when will the US government stops accummulating debt - we're certainly seeing the political pressure mounting).

US household debt:GDP trendline

United Kingdom

UK household debt:disposable income has fallen from 156% on 1 Jan 2009 to 146% on 30 June 2011. Some 14% UK residential mortgages may still be in trouble, "masking significant dangers ahead". "Extrapolating the recent pace of UK household deleveraging, We find that the ratio of household debt to disposable income would not return to its long-term trend until 2020."


Spanish house debt:disposable income has fallen by 4%. Like the UK, consumer credit has fallen sharply but home mortgages & other forms of credit have continued to grow.

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