DEBT, DELEVERAGING AND…DEFAULT?

The three Ds are lurking, thought not necessarily in equal amounts. That’s hardly surprising, but the details are somewhat sobering, as a new McKinsey & Co. report shows: Debt and Deleveraging: The Global Credit Bubble and its Economic Consequences.
Among some of the notable points in the analysis:
• “Enabled by the globalization of banking and a period of unusually low interest rates and risk spreads, debt grew rapidly after 2000 in most mature economies. By 2008, several countries…had higher levels of debt as a percentage of GDP than the United States.”
• “Deleveraging has only just begun…”
• “…Specific sectors of five economies have the highest likelihood of deleveraging…[in the U.S., the household and commercial real estate sectors have a relatively high likelihood of deleveraging]”
• “While we cannot say for certain that deleveraging will occur today, we do know empirically that deleveraging has followed nearly every major financial crisis in the past half-century…The historic episodes of deleveraging fit into one of four archetypes:
1)…credit growth lags behind GDP growth for many years;
2) massive defaults;
3) high inflation; or
4) growing out of debt through very rapid real GDP growth caused by a war effort, a ‘peace dividend’ following war, or an oil boom.”