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.