“The India debt story”

Seven features that define India’s debt dynamics

The key chart

**Total debt ($bn) and debt ratios (% GDP) for EM’s five largest debt markets** (Source: BIS; CMMP)

The key message

Following recent analysis of global and emerging market (EM) debt dynamics and in advance of the Indian government’s announcement of its annual budget on 1 February 2022, this post summarises seven key structural features of Indian debt dynamics.

India is the third largest EM debt market in terms of total, private sector (PSC), corporate (NFC), and household (HH) debt after China and Korea and ahead of Brazil and Russia. Beyond absolute size, the key features of Indian debt dynamics include:

PSC accounts for a relatively low share (51%) of total debt. In this context, India ranks #15 among our sample of 21 EM economies
In terms of the private versus public sector breakdown, India is similar to Brazil but very different to Russia, Korea and China
This matters because risks associated with elevated private sector debt are greater than those associated with public sector debt
While Indian debt markets are large in absolute terms, the level of indebtedness is relatively low. Both the NFC (55% GDP) and HH (36% GDP) debt ratios are below both EM averages and BIS threshold limits
Indian debt ratios are also relatively low in an historic context. HH indebtedness peaked at 43% GDP in 3Q07 while NFC indebtedness peaked at 71% GDP in 4Q12 (n.b. debt levels and levels of indebtedness are very different measures!)
India has experienced periods of elevated risks associated with excess credit growth in the (not-so-distant) past – first in the NFC sector (until 4Q14) and then in the HH sector (since 3Q19). Current risks are moderate, however, in both sectors with RGFs below recent peaks
Affordability risks in India are also relatively low in EM, global and historic contexts. India’s PS debt service ratio of 10% is well below its 10Y average of 13%

These features re-enforce the conclusion of “Global Debt Dynamics – V” that it is time to “replace the EM debt story with individual EM country debt stories.” Debt dynamics and their implications for policy, investment decisions and financial stability differ markedly even among EM’s five largest markets.

In short, India scores relatively well in terms of the risks associated with structure, indebtedness, growth and affordability of debt.

The India debt story

Size

India is the third largest EM debt market in terms of total ($4,656bn), PSC ($2,550bn), NFC (£1,540bn) and HH debt ($1,011bn) after China and Korea and ahead of Brazil and Russia (see chart above).

Structure

**PSC debt as % of total debt for EM’s five largest debt markets** (Source: BIS; CMMP)

A key feature of the structure of Indian debt is the relatively low share of private sector debt (51% total). In this context, India ranks #15 among the 21 BIS EM reporting economies. In other words, the private versus public sector breakdown of India debt is similar to Brazil but very different to Russia, Korea, and China (see chart above).

This matters because risks associated with elevated private sector debt are greater than those associated with elevated public sector debt.

Indebtedness

**HH and NFC debt ratios for EM economies** (Source: BIS; CMMP)

While India is a large debt market in absolute terms, the level of indebtedness is relatively low in an EM context (see above). In terms of PSC (90% GDP), NFC (55% GDP) and HH (36% GDP) debt ratios, India ranks #11, #12, and #10 respectively. Both the NFC and HH debt ratios are below the EM averages (dotted blue line) and the BIS threshold limits (dotted red line).

**Trends in Indian PSC, NFC and HH debt ratios (% GDP)** (Source: BIS; CMMP)

Indian debt ratios are also relatively low in an historic context. The HH debt ratio of 36% GDP is 7ppt below the 43% GDP peak reached back in 3Q07. The NFC debt ratio of 55% GDP is 16ppt below the 71% GDP peak reached in 4Q12, the point at which the PSC debt ratio also peaked at 106% GDP (see graph above).

NFC snapshot

**NFC sector snapshot** (Source: BIS; CMMP)

At the end of 2Q21, the level of outstanding NFC debt was $1,540bn, $39bn below the peak level recorded in the previous quarter. As noted above, India is the third largest NFC debt market in absolute terms with a market share of 4%. In terms of NFC indebtedness, however, India ranks #12 among the EM universe. NFC’s share of total debt (31%) is also relatively low. In this context, India ranks #14 among the EM universe.

HH snapshot

**HH sector snapshot** (Source: BIS; CMMP)

The level of outstanding HH debt was $1,010bn at the end of 2Q21, again £26bn below the peak level recorded in the previous sector. India is the third largest HH debt market in our EM universe with a market share of 6%. In terms of indebtedness, however, India ranks #10 among our EM universe. HH debt represents a relatively low 20% of total debt. In this context, India ranks #12 among our EM universe. In other words, the HH and NFC sectors share a number of similar characteristics.

Excess credit growth

**PSC relative growth factors plotted against PSC debt ratios** (Source: BIS; CMMP)

In terms of risks to macro policy, investment decisions and financial stability, the lesson from EM history is that the rate of excess credit growth can be as important as the level of indebtedness.

The risks associated with excess credit growth in India are relatively low in an EM context (see chart) above and in an historic context. The latest PSC RGF of 1.8% is lower than the EM average of 6.0% and the levels for China (2.3%), Korea (5.8%), Brazil (6.2%) and Russia (2.2%), countries with higher of similar (Brazil) PSC debt ratios.

**Trends in HH, NFC and PSC relative growth factors** (Source: BIS; CMMP)

In the post-GFC period, India has experienced periods of elevate growth risks, first in the NFC sector and then in the HH sector. Over the past five years, these risks have been concentrated in the HH sector but rose more recently in the NFC sector again (see chart above). Note however, the rates of excess growth rates have peaked in both cases (and remain modest in absolute terms).

Affordability

**EM debt service ratios (x-axis) and deviations from LT average (y-axis)** (Source: BIS; CMMP)

Affordability risks in India are also relatively low in an EM and global context and in an historic Indian context. The chart above plots the latest debt service ratios (DSR) for BIS reporting economies (x-axis) and the deviation of each DSR from its LT average. As can be seen India has a relatively low DSR of 9.8%, well below its 10-year average of 12.5% (see also chart below).

**Trends in Indian PSC debt service ratio** (Source: BIS; CMMP)

Conclusion

These features re-enforce the conclusion of “Global Debt Dynamics – V” that it is time to “replace the EM debt story with individual EM country debt stories.”

**Financial stability heatmap for EM’s five largest debt markets** (Source: BIS; CMMP)

Debt dynamics and their implications for policy, investment decisions and financial stability differ markedly even among EM’s five largest markets, for example (see the summary heatmap above).

In short, India scores relatively well in terms of risks associated with structure, indebtedness, growth and affordability of debt (n.b. the lack of red shading in the heatmap above in relation to India).

Please note that the summary comments and charts above are extracts from more detailed analysis that is available separately.

“It’s a record – (of sorts)”

But the mix of EA lending is still wrong

The key chart

**Trends in EA COCO-based lending in EURO bn** (Source: ECB; CMMP)

The key message

The outstanding stock of loans that support production and income formation in the euro area (“COCO-based loans”) hit a record high in November 2021 of €5,524bn. Is this cause for celebration? No, not quite…

Remarkably, this new high occurred 155 months after the previous high, recorded back in January 2009 (€5,5517bn). Equally notable/concerning is the fact that the stock of less-productive loans that support capital gains through higher asset prices (“FIRE-based loans”) also hit a new record high of €6,091bn. This was €1,503bn above the corresponding January 2009 level of €4,588bn.

What this means is that nearly all of the aggregate growth in euro area lending since the GFC has been in the form of less-productive lending (that also now accounts for more than half of total outstanding loans). So not only is current lending relatively subdued in volume terms (and negative in real terms) it is also largely the wrong type. FIRE-based lending accounted for 2.7ppt of the total 3.7% growth in private sector lending in November 2021, for example.

Over the past two years, I have been highlighting the associated, “hidden risks” associated with unorthodox monetary policy and the negative implications they have for future growth, leverage, financial stability and income inequality. More recently, I also noted that the ECB has (finally) called for (macroprudential policy) measures to address them with specific reference to “real estate risk” at the end of the year.

It is too early to expect changes in the next few data releases (starting this week on 28 January 2022) but I will be placing added emphasis on the trends in the mix of EA lending during 2022. Three key signals became four…

“It’s a record – (of sorts)”

The outstanding stock of loans that support production and income formation (COCO-based loans) hit a record high of €5,524bn in November 2021. Remarkably, this new high occurred 155 months after the previous high recorded in January 2009 (see chart above).

**Trends in, and breakdown of, EA private sector credit in EUR bn** (Source: ECB; CMMP)

The outstanding stock of loans that support capital gains through higher asset prices (FIRE-based loans) also hit a new high of €6,091bn in November 2021, €1,503bn above the level recorded in January 2009 (see chart above). FIRE-based lending currently accounts for 52% of total euro area lending.

**Trends in YoY growth rates in private sector lending in nominal and real terms** (Source: ECB; CMMP)

Current lending in the euro area is characterised by relatively subdued volumes and the wrong mix when compared to the pre-GFC period. In November 2006, for example (see graph above), lending to the private sector was growing at 11.2% YoY in nominal terms and 9.2% YoY in real terms. Productive, COCO-based lending accounted for 6.2ppt of this growth, while less-productive FIRE-based lending accounted for 5.0ppt.

**Drivers of recent YoY growth rates in EA private sector lending** (Source: ECB; CMMP)

In contrast, according to the latest data point for November 2021, lending to private sector grew only 3.7% YoY in nominal terms but fell -1.1% in real terms. Less-productive lending accounted for 2.7ppt of the total 3.7% growth (see chart above).

**Longer term drivers of EA private sector lending** (Source: ECB; CMMP)

As discussed in previous posts, QE has simply fuelled the shift away from COCO-based lending towards FIRE-based lending in the euro area. This trend has negative implications for future growth, leverage, financial stability and income inequality. Hence, the ECB’s calls in November last year for measures to mitigate risks from FIRE-based lending were welcome. Germany stands out in this context, given the combination of house price dynamics, the extent of house price overvaluation and the lack of specific macroprudential measures to address these risks.

Conclusion

Throughout 2021, CMMP analysis focused on three key signals from the money sector: monthly HH deposit flows (behaviour proxy); trends in consumer credit (growth proxy); and the level of synchronisation of money and credit cycles (policy proxy). These remain important indicators in 2022 to which I will add a key focus on the mix of lending and the potential impact on any new macroprudential measures. Watch this space…

“Global debt dynamics – V”

Emerging market debt dynamics

The key chart

**Trends in EM private sector debt ($bn) and debt ratio (% GDP) since the GFC** (Source: BIS; CMMP)

The key message

In this fifth post in my “Global Debt Dynamics” series, I consider the hypothesis that the “EM-debt” story has been replaced by the “China-debt” story.

At its simplest, the EM-debt story refers to the sharp increase in the EM share of global private sector credit (PSC) and the narrowing of the gap between the aggregate PSC debt ratios for advanced (DM) and emerging (EM) economies since the global financial crisis (GFC).

The EM share of global PSC has increased sharply from 16% in 2Q08 to 38% in 2Q21. Over the same period, the gap between the PS debt ratios has narrowed from 86ppt to only 8ppt. This represents a remarkable structural shift from DM to EM economies.

Strip out China, however, and the EM share of global PSC is largely unchanged since the GFC. China has accounted for 20ppt of the 22ppt increase in market share described above and currently accounts for almost 70% of total EM PSC alone. For added perspective, China’s outstanding stock of PSC ($37tr) is c.10x and c.14x the outstanding stock in Korea and India respectively, the second and third largest EM PSC markets. Viewed from the narrow perspective of relative size and growth, there is some support for the hypothesis that the China debt story has replaced the EM debt story, or at least overtaken it.

There are two problems with this conclusion however: (1) it relies on an overly narrow view of global debt dynamics; and (2) in truth, there is no such thing as an EM debt story in the first place.

The EM universe includes a group of over 20 economies with very heterogeneous debt dynamics in terms of the level of indebtedness, the rate of excess credit growth and affordability of debt:

For most EM economies, the “potential-growth” story remains in both the NFC and HH sectors
Some of the fastest rates of excess credit growth are occuring in EM economies that already exhibit relatively high levels of indebtedness
Elevated affordability risks in a number of EM economies is of concern given the expected future direction of global rates

While the EM classification remains convenient, it is increasingly less relevant in terms of understanding the impact of debt dynamics on macro policy, investment decisions and financial stability.

Replace the EM debt story with individual EM country debt stories not just the China version.

EM debt dynamics

At its simplest, the so-called, “EM-debt” story refers to the sharp increase in EM’s share of global PSC and the rapid narrowing in the gap between the average PSC debt ratios in advanced (DM) and EM economies since the Global Financial Crisis (GFC).

**Trends in private sector debt ($tr) and debt ratio (% GDP) since the GFC** (Source: BIS; CMMP)

The outstanding stock of EM PSC has grown from $14tr in 2Q08 to $54tr in 2Q21, a nominal CAGR of 11.5% (see graph above). Over the same period, the outstanding stock of DM PSC has risen from $71tr to $87tr, a nominal CAGR of only 1.5%.

**Breakdown of global PSC (% total) since the GFC** (Source: BIS; CMMP)

The EM share of global PSC has increased sharply from 16% in 2Q08 to 38% in 2Q21, while the DM share of global debt has fallen from 84% to 62% (see chart above). As discussed in “Global Debt Dynamics –II”, this structural shift from DM to EM is one of the two key structural changes that have taken place in the global PSC market since the GFC (the other being the shift away from HH to NFC debt).

**Trends in PSC debt ratios (% GDP) since the GFC** (Source: BIS; CMMP)

The gap between the average DM and EM PSC debt ratio (debt % GDP) has also narrowed sharply since the GFC. At the end of 2Q08 the respective PSC debt ratios were 172% GDP and 86% GDP, a gap of 86ppt. At the end of 2Q21, the respective PSC debt ratios were 175% GDP and 167% GDP, a gap of only 8ppt (see chart above).

**Trends in share of global PSC since GFC** (Source: BIS; CMMP)

Strip out China, however, and the EM share of global PSC is largely unchanged since the GFC (see green line in chart above). China has accounted for 20ppt of the 22ppt increase in the increase in market share described above. As result, China’ share of EM PSC has risen from 36% to 68% over the period (and from 6% to 26% of global PSC).

**China’s share of EM debt by category of debt** (Source: BIS; CMMP)

China accounts for 64%, 68%, 71% and 61% of total, PSC, NFC and HH debt in EM respectively (see chart above). China’s outstanding stock of PSC ($37tr) is c.10x and c.14x the outstanding stock in Korea and India respectively, the second and third largest EM PSC markets (see chart below).

**Relative size of PSC in largest EM PSC markets** (Source: BIS; CMMP)

So in terms of relative growth, outstanding stock and relative size there are grounds for accepting the hypothesis that the EM story has been replaced by the China debt story. However, a key theme of CMMP analysis is that debt dynamics are not simply about the size/level of outstanding debt. There are other “chapters” to EM debt story including the levels of indebtedness, the growth rate in debt and the affordability of debt, for example.

**EM HH debt ratios plotted against NFC debt ratios** (Source: BIS; CMMP)

For most EM economies (as classified by the BIS) the potential “EM-growth” story remains. NFC and HH debt ratios in 16 EM economies remains below the 90% GDP and 85% GDP maximum threshold levels identified by the BIS (see chart above), for example. In contrast, elevated debt levels exist in both sectors in Hong Kong and Korea and in the NFC sector in China, Singapore and Chile.

**NFC RGF plotted against NFC debt ratio** (Source: BIS; CMMP)

As in DM, some of the fastest rates of excess credit growth are occurring in EM economies that already exhibit relatively high levels of indebtedness (for an explanation of the methodology, see here). In the NFC sector, for example, relatively high levels of excess credit growth have occurred in Hong Kong, Singapore, Korea, Chile and Saudi Arabia (see chart above). Similarly, relative high levels of excess HH credit growth have occurred in relatively indebted HH sectors in Korea, Hong Kong, Thailand, Malaysia and China (see graph below).

**HH RGF plotted against HH debt ratio** (Source: BIS; CMMP)

Elevated affordability risks in a number of EM economies is of concern given the likely future direction of global rates. Private sector debt ratios are not only high in absolute terms, but they are also above respective LT averages in Hong Kong, Turkey, China, and Brazil. Note in contrast the relatively low levels of affordability risk in CEE, Russia and India (see chart below).

**Global DSR (x-axis) and deviations from LT averages (y-axis)** (Source: BIS; CMMP)

Conclusion

In truth, there is no such thing as an EM debt story. The EM universe includes a group of economies with very heterogeneous debt dynamics. My financial stability heatmap summarising the debt dynamics of the 10 EM economies that account for over 90% of total EM PSC illustrated this clearly (see below).

**Financial stability heatmap – top 10 EM economies** (Source: CMMP)

So while the EM classification remains convenient, it is increasingly less relevant in terms of understanding the impact of debt dynamics on macro policy, investment decisions and financial stability.

Please note that the summary comments and charts above are extracts from more detailed analysis that is available separately.

“Global debt dynamics – IV”

Household sector debt dynamics

The key chart

**Trends in HH debt ($tr) and HH debt ratios (% GDP) since GFC** (Source: BIS; CMMP)

The key message

The household (HH) sector was at the epicentre of the Global Financial Crisis (GFC). Since then, three key structural shifts have changed the sector’s potential impact on macro policy, growth and financial stability:

a shift away from HH debt towards NFC debt within private sector debt
a shift away from HH debt towards government debt within total debt
a regional shift away from advanced economies towards emerging economies (EMs) driven largely, but not exclusively, by Chinese HH debt dynamics

The US ($17tr) accounts for almost a third of total HH debt. The level of US debt is almost 2x China’s HH debt and over 5x Japanese HH debt (the next two largest markets by size). The US and China collectively account for half of global HH debt. Once again, neither rank among the top ten most indebted HH economies, however.

Of the 43 BIS reporting economies, only 11 have HH debt ratios above the maximum threshold level (compared with 20 in the NFC sector). Of these 11, eight also have “above-threshold” NFC debt ratios – Switzerland, Norway, Canada, Denmark, Korea, the Netherlands, Sweden and Hong Kong.

Risks associated with excess HH debt growth in advanced economies are lower than in EM and, in contrast to NFC debt dynamics, are in economies with relatively low levels of HH indebtedness (eg, France and Germany). Growth risks also remain in Norway, Sweden, New Zealand, Canada and Switzerland among advanced economies.

Elevated affordability risks among advanced economies exist in Sweden and Norway where HH debt service ratios are not only high in absolute terms, but they are also above their respective LT averages.

Among the top ten economies that account for over 80% of total HH debt, Korea stands out due to elevated risks relating to HH indebtedness, excess HH debt growth, affordability and house price appreciation. This may explain why some Koreans feel that they are playing a real-life version of the “Squid Game”?

Household debt dynamics

Household debt hit a new high of $55tr during 2021 (see chart above). The HH debt ratio (67% GDP) remains elevated by historic standards but is below its 4Q20 peak (71% GDP) and below the BIS’ maximum threshold level of 85% GDP. This is in contrast to the NFC sector, where global indebtedness (105% GDP) is above the sector’s maximum threshold level of 90% GDP.

**Trends in the breakdown of PSC (% total) since the GFC** (Source: BIS; CMMP)

There has been a shift away from HH debt since the GFC towards greater levels of corporate (NFC) debt within private sector debt (PSC) and towards government debt within total global debt. HH debt’s share of total PSC has fallen from 45% to 39% over the period (see chart above).

**Trends in the breakdown of total debt (% total) since the GFC** (Source: BIS; CMMP)

More significantly, HH debt’s share of total debt has fallen from 32% to 25% over the period, while the share of government debt has increased from 29% to 37% (see chart above). This second shift, driven by advance economy debt dynamics (and the US and UK especially), has important implications for financial stability (see “Global Debt Dynamics – I”).

**Trends ($tr) and geographic breakdown of HH debt and EM share (% total) since GFC** (Source: BIS; CMMP)

Since the GFC, there has also been a significant geographic shift away from advanced economies towards emerging markets. This shift has been driven largely, but not exclusively, by Chinese debt dynamics. The share of total HH debt accounted for by EMs has risen from 10% to 31%. China’s share of total HH debt has risen from 2% to 19%, while EM x China’s share has risen from 8% to 12%. Note that China accounts for 61% of total EM HH debt alone and that China, Korea, India and Brazil account for 82% of EM HH debt collectively.

**Top 20 BIS reporting economies ranked by outstanding HH debt ($tr)** (Source: BIS; CMMP)

The US ($17tr) accounts for almost a third of total HH debt alone. The outstanding stock of HH debt at the end of 2Q21 in the US was 1.7x the stock of Chinese HH debt (the second largest HH debt market) and 5.3x the stock of Japanese HH debt (the third largest HH debt market). Collectively the US and China account for more than half of global HH debt outstanding (see chart above).

**Top 22 BIS reporting economies ranked by HH debt ration (% GDP)** (Source: BIS; CMMP)

Once again, neither rank among the top-ten most indebted HH markets, however (see chart above). The US ranks #12 while China ranks #22. In contrast, Canada, Australia, Korea and Switzerland rank inside the top-ten rankings based on both the level of HH debt ($tr) and the level of HH indebtedness (% GDP).

**HH and NFC debt ratios (% GDP) for BIS reporting economies** (Source: BIS; CMMP)

Of the 43 BIS reporting economies, 11 have HH debt ratios that exceed the BIS’ maximum threshold of 85% of GDP. Of these 11, eight also have NFC debt ratios above maximum thresholds – Switzerland, Norway, Canada, Denmark, Korea, the Netherlands, Sweden and Hong Kong. The remaining three economies with above-threshold HH debt ratios but below-threshold NFC debt ratios are Australia, New Zealand and the UK (see chart above).

**Excess HH debt growth (RGF) plotted against HH debt ratio for advanced economies** (Source: BIS; CMMP)

The rate of “excess HH debt growth” in advanced economies (2.1%) is lower than the global (3.8%) and EM (8.7%) averages (click here for an explanation of the underlying methodology). In contrast to NFC sector dynamics, the highest rates of excess HH debt growth among advanced economies occurred in economies with relatively low levels of HH indebtedness. As can be seen in the chart above, France (4.2%) and Germany (3.8%) have seen the highest rates of excess HH debt growth over the past three years. Their HH debt ratios are 67% GDP and 58% GDP respectively, below the advanced economy average of 77% GDP and the BIS maximum threshold level of 85% GDP.

Risks associated with excess HH debt growth are also elevated in Norway, Sweden, New Zealand, Canada and Switzerland among advanced economies. In each case, growth in HH debt is outstripping growth in nominal GDP despite high absolute and relative levels of HH indebtedness (see chart above).

**HH debt service ratios and deviation from LT average** (Source: BIS; CMMP)

HH affordability risks within our sample of advanced economy are elevated in Sweden and Norway. In these economies, the HH debt service ratios (DSR) are not only high in absolute terms, but they are also above their respective LT averages despite low absolute HH borrowing costs. HH DSRs are also relatively high in Canada, Australia, the Netherlands and Denmark in absolute terms. However, in each of these cases the current DSR is below the respective LT average.

HH financial stability heatmap

**Financial stability heatmap – HH debt** (Source: CMMP)

(* Note HH DSR ratios are only available for selected BIS reporting economies)

Significant variations exist in the impact of HH debt dynamics on financial stability among the ten economies that collectively account for 81% of total HH debt. Key themes include:

Korea stands out among this sample in terms of elevated risks associated with HH indebtedness, the rate of excess HH credit growth and the affordability of debt (in aggregate terms*). Note also that risks are elevated in terms of the growth in house prices (see chart below). I will return to Korean debt dynamics in more detail in a subsequent post

**Trends in house prices (% YoY, real terms) since GFC** (Source: BIS; CMMP)

Four of the five economies with the largest levels of outstanding debt – US, China, Japan and Germany – have HH debt levels below the maximum threshold level
The US, which accounts for 31% of total HH debt, has relatively low risks in terms of HH indebtedness, the rate of excess growth in HH debt and the affordability of HH debt
China has elevated risks associated with the rate of excess HH debt growth and the affordability of debt (at the aggregate level)

**Trends in composite cost of French HH borrowing for house purchase** (Source: ECB; CMMP)

France has elevated risks associated with the rate of excess HH debt growth. France is also the only economy in this sample where the HH debt service ratio is above its LT average. This is despite the fact that the composite cost of HH borrowing is at an all-time low (see chart above).

The next post in this series focuses on EM debt dynamics.

Please note that the summary comments and charts above are extracts from more detailed analysis that is available separately.

“Global debt dynamics – III”

Corporate sector debt dynamics

The key chart

**Trends and breakdown of NFC debt ($tr) and trend in debt ratio (% GDP) since GFC**
(Source: BIS; CMMP)

The key messages

Corporate debt hit a new high in 2021 ($86tr) and increased its market share of total private sector debt (PSC) to 61%, up from 55% at the time of the GFC. The aggregate debt ratio was 105% of GDP at the end of 2Q21, 25ppt above the BIS’ maximum threshold level (albeit below its 4Q20 peak of 110%).

Since the GFC, there has been a significant structural shift away from advanced economies towards emerging economies. Chinese debt dynamics have driven this shift almost exclusively.

China and the US collectively account for 52% of total NFC debt. However, while China ranks #6 globally in terms of NFC indebtedness, the US ranks only #22.

Of the 43 BIS reporting economies, 20 have NFC debt ratios above the maximum threshold. Among advanced economies only seven have “below-threshold” NFC debt ratios – the US, Germany, Italy, Greece, the UK, New Zealand and Australia (note, however, that the last three have “above-threshold” levels of HH debt).

Some of the highest rates of excess NFC growth have occurred in economies where debt ratios are already high and above average – Switzerland, Japan, France, Sweden and Canada. Excess growth has also occurred in other relatively indebted economies – Norway, Spain and Denmark – but at slightly slower-than-average rates. Elevated NFC affordability risks exist in Sweden, France, Canada and Norway.

Among the ten economies that collectively account for almost 80% of total NFC debt, five have above-threshold levels of NFC debt – France, China, Canada, Japan and South Korea. Of these, Japan, South Korea and France have also experienced above-average rates of excess NFC debt growth. Despite low borrowing costs, NFC debt service ratios are above their LT averages in France, Japan, Canada, Germany and the US. In contrast, NFC affordability risks are relatively low in the UK and Italy. Outside this sample, risks associated with NFC indebtedness, excess rates of NFC debt growth, and affordability of NFC debt are noticeably elevated in Sweden.

Corporate sector debt dynamics

Corporate (NFC) debt hit a new record high of $86tr in 2021 (see chart above). It accounted for 61% of total private sector debt (PSC) at the end of 2Q21, up from 55% at the time of the GFC. The aggregate debt ratio of all 43 BIS reporting economies was 105% GDP at the end of 2H21, above the maximum threshold limit of 90% GDP but below the 4Q20 peak of 110% GDP.

**Structural shifts in NFC debt since the GFC** (Source: BIS; CMMP)

Since the GFC, there has been a significant structural shift away from advanced economies towards emerging economies (EM), driven almost exclusively by China’s NFC debt dynamics. Advanced economies still account for the largest amount of outstanding NFC debt (49tr) but their share has fallen from 79% at the time of the GFC to 56% at the end of 2Q21 (see chart above). Emerging economies’ NFC debt totalled $38tr at the end of 2H21, 44% of total NFC debt from 21% at the time of the GFC. Note that China accounts for 71% of EM NFC debt and 31% of total NFC debt alone (see chart below). Excluding China, EMs share of NFC debt is largely unchanged since the GFC.

**Trends in China’ share of EM NFC debt and total NFC debt** (Source: BIS; CMMP)

**Top 20** **BIS reporting economies ranked by outstanding NFC debt** ($tr) (Source: BIS; CMMP)

China ($27tr) and the US ($18tr) collectively account for 52% of total NFC credit. However, while China ranks #6 in terms of NFC indebtedness, the US ranks only #22. Indeed, among the five economies that collectively account for 80% of total NFC debt – China, the US, Japan, France, and Germany – only China and France (#5) rank among the top-ten economies ranked by NFC indebtedness. Once again, debt levels and levels of indebtedness tell us very different things.

**Top 20 BIS reporting economies ranked by NFC debt ratio (% GDP)** (Source: BIS; CMMP)

Of the 43 BIS reporting economies, 20 have NFC debt levels that exceed the BIS’ maximum threshold. Of these 20 economies, eight also have HH debt ratios about maximum thresholds – Hong Kong, Sweden, the Netherlands, Norway, China, Denmark, Canada and South Korea. The other 12 economies with NFC debt ratios above the maximum threshold are Luxembourg, Ireland, France, China, Belgium, Singapore, Finland, Japan, Chile, Spain, Portugal and Austria.

Note that among advanced economies, there are only seven economies with NFC debt ratios below the maximum threshold – the US, Germany, Italy, Greece, the UK, New Zealand, and Australia. Of these, the final three have HH debt ratios above maximum thresholds however (see chart above).

**Excess NFC growth (RGF) plotted against NFC debt ratio for advanced economies**
(Source: BIS; CMMP)

Some of the highest rates of excess NFC growth have occurred in economies where NFC debt ratios are already high. As can be seen in the chart above, excess NFC growth rates in Switzerland, Japan, France Sweden and Canada all exceed the average excess growth rate for advanced economies despite the relatively high NFC debt ratios in each of these economies. Excess credit growth has also occurred in other relatively indebted economies – Norway, Spain, and Denmark – but at a slower-than-average rate.

**NFC debt service ratios and deviations from LT average** (Source: BIS; CMMP)

Elevated affordability risks in the NFC sector exist in Sweden, France, Canada and Norway. In each of these economies, NFC debt ratios are not only high in absolute terms (above 50%) but they are also above the respective LT averages, notably in Sweden and France.

NFC financial stability heatmap

**Financial stability heatmap – NFC debt** (Source: CMMP)

Important variations exits in relation to the impact of NFC debt dynamics on financial stability among the ten economies that account for just under 80% of total NFC debt (see heatmap above). Note that:

Five of these economies – France, China, Canada, Japan and South Korea – have NFC debt ratios that exceed the 90% GDP BIS maximum threshold
Three of these five – Japan, South Korea and France –also exhibit well-above-average rates of excess NFC credit growth
Despite relative low costs of NFC borrowing, DSRs are above their respective LT averages in France, Japan, Canada, Germany and the US
Outside this sample, risks associated with the level of NFC indebtedness, excess growth in NFC debt and the affordability of debt are noticeably elevated in Sweden, an economy ranked #16 in terms of the absolute level of NFC debt but #3 in terms of NFC indebtedness.

The next post in this series focuses on household debt dynamics

Please note that the summary comments and charts above are extracts from more detailed analysis that is available separately.

“Global debt dynamics – II”

Private sector debt dynamics

The key chart

**Financial stability heatmap for economies that account for 80% of outstanding PSC**
(Source: CMMP)

The key message

In contrast to conventional economic theory, CMMP analysis emphasises the impact of private sector debt dynamics on macro policy, global growth, investment decisions and risks to financial stability. Attention extends beyond the absolute level of debt to include the level of indebtedness, the rate of growth in debt and the affordability of debt. Key themes from the latest BIS data release include:

The structure of global PSC has shifted towards corporate (NFC) and emerging market (EM) debt. The latter shift reflects China debt dynamics exclusively
Absolute debt levels and debt ratios tell us very different things. China and the US account for over half of outstanding PSC, but neither ranks among the top ten most indebted economies
Eight BIS reporting economies have NFC and HH debt ratios that both exceed maximum BIS threshold levels – Hong Kong, Switzerland, Norway, the Netherlands, Sweden, Denmark, Canada and South Korea
Some of the highest rates of “excess credit growth” among advanced economies have occurred in economies where debt ratios are already high – Japan, France, Switzerland, Sweden, Canada (and Norway).
Elevated affordability risks exist in Sweden, Switzerland, France, Japan, Finland and Canada among advanced economies and in Turkey, China, Brazil and South Korea among EMs

Significant variations exist in the impact of PSC dynamics on financial stability among the ten economies that account for 80% to total global PSC (see heatmap above):

In China, risks are elevated in relation to NFC indebtedness, the rate of growth in HH debt and the affordability of PSC
In contrast, risks in the US are relatively low with the exception of the affordability of NFC debt
In North America, risks are more elevated in Canada, however, due to the levels of NFC and HH indebtedness and the affordability of debt in the NFC sector
Within the larger euro area economies, France stands out due to elevated risks associated with NFC and HH indebtedness, the rate of growth of debt and affordability in both sectors
In Asia, South Korea stands out for the levels of NFC and HH indebtedness, the rate of growth in debt in both sectors and the affordability of PSC

Private sector debt dynamics

The level and structure of global PSC

**Trend and breakdown of PSC ($tr) and trend in debt ratio (% GDP) since GFC** (Source: BIS; CMMP)

Global PSC hit a new record high of $141tr in 2021 (see chart above). NFC debt of $86tr accounted for 61% of total PSC, up from 55% at the time of the GFC, while household (HH) debt of $55tr accounted for 39% of total PSC, down from 45% at the time of the GFC.

Advanced economies’ debt of $87tr accounted for 62% of total PSC, down from 84% at the time of the GFC. In contrast, EM debt of $54tr accounted for 38% of total PSC, up from 16% over the same period (see chart above). Note that China accounted for $37tr or 69% of total EM debt alone. As highlighted in “Global Debt Dynamics – I”, the EM debt story is increasingly a China debt story (see also the final post in this series). Excluding China, EMs’ share of total PSC has remained unchanged since the GFC.

Key theme #1: The structure of global PSC has shifted towards greater shares of NFC debt (at the borrower level) and EM debt (at the regional level). The latter shift reflects debt dynamics in China exclusively.

**Top 20 BIS reporting economies ranked by level of debt ($tr)** (Source: BIS; CMMP)

China ($37tr) and the US ($35tr) have the highest levels of PSC among the BIS reporting countries and account for 51% of total PSC collectively (see chart above). Neither economy ranks among the top ten most indebted economies, however. China is ranked #11 and the US is ranked #21 (see chart below).

**Top 21 BIS reporting economies ranked by debt ratio (%GDP)** (Source: BIS; CMMP)

Of the five economies that have the highest levels of outstanding PSC, only France is included in the top ten most indebted economies (see chart above).

Key theme #2: Debt levels and debt ratios tell us very different things – something that popular/populist US debt narratives often overlook (see “Houston, do we have a problem?”).

PSC and financial stability risks

In assessing risks to global financial stability, CMMP analysis extends beyond the level of debt to include the level of indebtedness (a stock-flow perspective), the rate of growth in debt, and the affordability of debt (a flow-flow perspective).

Private sector debt ratios

The chart below plots the 43 BIS reporting nations according their NFC debt ratios (x-axis) and HH debt ratios (y-axis). The two red lines indicated the maximum threshold levels identified by the BIS of 90% GDP for NFC debt and 85% for HH debt. The BIS considers debt above these levels to be a drag on future growth.

**HH and NFC debt ratios (% GDP) for all 43 BIS reporting economies** (Source: BIS; CMMP)

Key theme #3: Of the 43 BIS reporting nations, eight have NFC and HH debt ratios that both exceed the maximum BIS threshold levels of 90% and 85% of GDP respectively – Hong Kong, Switzerland, Norway, the Netherlands, Sweden, Denmark, Canada and South Korea.

A further twelve economies have excess NFC debt ratios and three economies have excess HH debt ratios. Note, in contrast, that the US is one of only four advanced economies to have NFC and HH debt ratios below the BIS threshold (along with Germany, Italy and Greece). Note also that the traditional distinction between advanced economies and EMs is increasing irrelevant/unhelpful, especially when analysing Asian debt dynamics (see “D…E…B…T, Part II”).

Excess PSC growth (RGF analysis)

CMMP analysis has used the simple concept of relative growth factor (RGF) analysis since the early 1990s as a first step in analysing the sustainability of debt dynamics. In short, this approach compares the rate of “excess credit growth” with the level of debt penetration in a given economy. The three-year CAGR in debt is compared with the three-year CAGR in nominal GDP to derive a relative growth factor. This is then compared with the level of debt expressed as a percentage of GDP (the debt ratio).

The concept is simple – one would expect relative high rates of “excess credit growth” in economies where the level of leverage is relatively low and vice versa. Conversely, red flags are raised when excess credit growth continues in economies that exhibit relatively high levels of leverage.

**Excess PSC growth plotted against PSC debt ratio (% GDP)** (Source: CMMP)

The chart above plots PSC RGFs against the PSC debt ratio as at the end of the 2Q21. The red lines represent the average levels for all advanced economies. The economies located in the top right hand quadrant have experienced above average excess credit growth despite having above average PSC debt ratios.

Key theme #4: A peculiar feature among advanced economies is the fact that some of the highest rates of “excess credit growth” have occurred in economies where PSC debt ratios are already high – Japan, France, Switzerland, Sweden, Canada (and Norway).

Affordability of debt

The BIS provides debt service ratios for the private non-financial sector on a quarterly basis. DSRs provide important information about the interactions between debt and the real economy as they measure the amount of income used for interest payments and amortisations (ie, a flow-to-flow comparison). While the BIS applies a consistent methodology to derive these ratios, they are unable to remove country-specific factors completely. For this reason, the BIS typically focuses in trends in national DSRs over time. CMMP analysis incorporates both the level of the DSR and its deviation from long-term averages.

**Debt service ratios – deviations from LT average versus current level** (Source: BIS; CMMP)

Key theme #5: Elevated affordability risks exist in Sweden, Switzerland, France, Japan, Finland and Canada among advanced economies and in Turkey, China, Brazil and South Korea among EMs.

In each case, the DSRs are not only relatively high in absolute terms, they are also above the 10-year average levels seen in each economy.

Financial stability heatmap

Significant variations exist in the impact of private sector dynamics among the ten economies that account for 80% of global debt (see heatmap above) and also within regions (eg N America, the euro area) and between different advanced and emerging economies:

In China, risks are elevated in relation to NFC indebtedness, the rate of growth in HH debt and the affordability of PSC
In contrast, risks in the US are relatively low with the exception of the affordability of NFC debt
In North America, risks are more elevated in Canada, however, due to the levels of NFC and HH indebtedness and the affordability of NFC debt
Within the larger euro area economies, France stands out due to elevated risks associated with NFC and HH indebtedness, the rate of growth of debt and affordability in both sectors
In Asia, South Korea stands out for the levels of NFC and HH indebtedness, the rate of growth in debt in both sectors and the affordability of PSC

The next post in this series focuses on NFC debt.

Please note that the summary comments and charts above are extracts from more detailed analysis that is available separately.

“Global debt dynamics – I”

Why does the changing nature of global debt matter?

The key chart

**Changes in breakdown of global debt (% total) since the GFC** (Source: BIS; CMMP)

The key message

“Private debt causes crises – public debt (to some extent) ends them.”
Professor Steve Keen, June 2021

While a great deal of attention is focused on the fact that global debt levels hit new highs during 2021, too little attention is given to the important changes that have taken place in the structure of global debt since the GFC.

This matters because conventional macro theory struggles to deal with the implications here, since it typically ignores private debt while seeing government debt as a problem rather than as a solution.

There has been an important shift away from household (HH) debt towards government debt at the aggregate, global level since the Global Financial Crisis (GFC). Debt dynamics in advanced economies have driven this shift, most notably in the US and the UK. In contrast, the structure of emerging economies’ (EMs) debt remains broadly unchanged, with a structural bias towards private sector debt. These trends matter for a number of reasons:

First, and in contrast conventional theory, we know that government deficits increase the supply of money (not the demand for money), crowd-in investment private spending (as opposed to crowding it out) and depress interest rates (rather than driving them up).
Second, and from this, we also know that while private sector debt typically causes crises, public sector debt typically limits their damage/ends them.
Third, the structure of US and UK debt is now the mirror image of the pre-GFC period, which reduces associated risks since governments face different financial constraints to HHs and NFCs and cannot, as currency issuers, become insolvent. Risks associated with excess credit growth exist more obviously in other advanced economies.
Fourth, EMs face very different risks to advanced economies. These are associated largely with the level of NFC debt, the growth rate in HH debt and the increasing dominance of China in EM debt.

Global debt dynamics – I

Debt dynamics since the GFC

In the “Seven lessons from the money sector in 2021”, I noted that our understanding of global debt dynamics is improved significantly by extending analysis beyond the level of debt to include its structure, growth and affordability.

In this first post of 2022, and the first in a series of five posts reviewing current global debt dynamics, I focus on the implications of the changes that have taken place in the structure of global debt since the Global Financial Crisis (GFC).

**Global debt levels ($tr) and debt ratios (% GDP) as at end 2Q21** (Source: BIS; CMMP)

A great deal of attention has focused on the fact that global debt levels hit new, record highs in 2021 (see chart above). According to BIS statistics released on 6 December 2021, total debt (to the non-financial sector) reached $225tr at the end of 2Q21. NFC debt reached $86tr (38% total), government debt reached $83tr (37% total) and HH debt reached $55tr (25% total).

Note that while it is common to aggregate these three categories of debt together, it is also important to recognise that NFC and HH debt sit on the liabilities side of private sector balance sheets, while government debt sits on the assets side of private sector (and RoW) balance sheets.

Note also, that while debt levels are at record highs, debt ratios (ie, debt as a percentage of GDP) are below their 4Q20 peaks in each category.

Too little attention has focused, however, on the important changes that have taken place to the structure of global debt since the GFC (see chart above). While NFC debt’s share of total debt has remained relatively stable at just under 40%, there has been an important shift away from HH debt to government debt over the period. HH debt’s share of total debt has fallen from 32% to 25% (see chart below). In contrast, government debt’s share of total debt has risen from 29% to 37%.

**Trends in shares of HH and government debt (% total debt) since GFC** (Source: BIS; CMMP)

Debt dynamics in advanced economies have driven this shift, most notably in the US and the UK (see chart below). In advanced economies, the US and the UK the share of HH debt has fallen from 34% to 26%, from 42% to 28% and from 43% to 30% respectively. In contrast, the respective shares of government debt to total debt have risen from 29% to 42%, from 26% to 44% and from 20% to 45% respectively. Similar shifts have also taken place in the EA, albeit in a much more muted fashion. This reflects a much lower (27%) share of HH debt at the time of the GFC in the EA.

**Changes in structure of global debt by region** (Source: BIS; CMMP)

The structure of EM debt remains broadly unchanged, however, with a bias towards private sector debt. At the end of 2Q21, the shares of HH, NFC and government debt to total debt in EM were 22%, 50% and 28% respectively.

**Trends in structure (% total) of EM debt since GFC** (Source: BIS; CMMP)

Note that China’s share of total EM debt has risen from 31% to 64% over the period. In other words, the EM debt story is increasingly a “China debt” story. For reference, China’s share of total global debt has also increased from 5% to 21% over the same period (see chart below). In contrast, EM excluding China’s share of total global debt has remain unchanged.

**Trends in EM share of global debt since GFC** (Source: BIS; CMMP)

Why does this matter?

This matters for a number of reasons. First, and in contrast conventional theory, we know that government deficits increase the supply of money (not the demand for money), crowd-in investment private spending (as opposed to crowding it out) and depress interest rates (rather than driving them up).

Professor Steve Keen has written extensively on this subject. He notes that, “rather than deficits meaning that the government has to take money away from the private sector – which is what the mainstream thinks the government does when it sells bonds to cover the deficit – the deficit creates money by increasing the bank deposits of the private sector”. In simple terms, by not studying the accounting involved in government deficits, Keen argues that they (mainstream economists) have wrongly classified them as increasing the demand for money, when in fact they increase the supply of money. I agree.

The implication here is that many arguments regarding global debt are in fact, back-to-front. Government deficits crowd in private spending and investment by increasing the supply of money. They also typically drive down interest rates rather than driving them up.

Second, and from this, we also know that while private sector debt typically causes crises, public sector debt typically limits their damage/ends them. Consider the EA’s fiscal rules that put limits on government debt and deficits but completely ignored private debt and credit and the history of Spanish debt dynamics after the introduction of the euro (see chart below).

**Ignore excess private sector debt growth at your peril I – Spain** (Source: BIS; CMMP)

After the introduction of the euro, government debt in Spain fell from 70% to 36% in March 2008. In contrast, private sector debt rose from 80% of GDP to 208% of GDP over the same period before peaking at 227% in 2Q10 at the height of the Spanish banking crisis (see chart above). Similar trends were also seen in other advanced economies. The chart below illustrates trends in private sector credit and government debt in the US.

Ignore excess private sector growth at your peril II – the US (Source: BIS; CMMP)

Excess growth in private sector debt up to a crisis point is followed by increases in government debt post-crisis in response to the collapse in demand as credit growth turns negative and the private sector reduces leverage. In short, recent history supports Professor Keen’s hypothesis that private debt causes crisis, while public debt ends them (or limits their damage). This topic and these case studies are developed in more detail in other posts/CMMP research.

**Shift from US and UK HH debt to government debt (% total debt) since GFC** (Source: BIS; CMMP)

Third, the structure of US and UK debt is now the mirror image of the pre-GFC period (see chart above). This reduces associated risks since governments face different financial constraints to HHs and NFCs and cannot, as currency issuers, become insolvent.

**Rates of excess credit growth in EM** (Source: CMMP)

Fourth, EMs face very different risks to advanced economies. These are associated largely with the level of NFC debt, the growth rate in HH debt (see chart above) and the increasing dominance of China in EM debt – subjects that I will address in the final post in this series.

Conclusion

Global debt dynamics are a core element of CMMP analysis. While it is natural to focus initially on the new highs in global debt levels, it is also important not to miss the important messages associated with changes in the structure, growth and affordability of global debt.

The shift in the structure of global debt from HH debt to government debt has important implications for the severity of recessions, monetary dynamics, inflation, rates and investment risks. The nature of these implications also vary depending on whether governments are currency issuers (eg, US and UK) or currency users (eg, EA governments). The risks of a return to pre-pandemic policy mixes remain in all areas, however.

In the next post, I will examine dynamics in global private sector debt.

Please note that the summary comments and charts above are extracts from more detailed analysis that is available separately.