Following on from our annual update on the wealth (re)distribution of nations [27], we thought it important to look at the other side of the household balance sheet - that of 'debt' to see just how much 'progress' has been made in the world. In the aftermath of the credit crisis (and the ongoing crisis in Europe), government debt levels continue to rise but combining trends in household debt highlights countries that have sustainable (and unsustainable) overall debt levels - and thus the greatest sovereign debt problems. Whether the 'number' is from Reinhart & Rogoff or not, the reality is that moar debt is not better and the nations with the highest debt-per-capita may surprise many. Critically, despite the rise in 'wealth' from 2000-2008, the ratio of debt-to-net-worth rose on average by about 50% (and in many nations continues to rise).
With the regular occurrence of sovereign debt crises, relatively little attention has been given to the parallel issue of personal debt. Yet household debt has transformed over the past 30 years from low level borrowing mostly securitized on housing assets into wholesale credit seemingly available to anyone for any purpose.
As a consequence, household debt as a proportion of income has doubled almost everywhere, and has on occasion exploded by a factor of ten or more.
Our analysis of household debt highlights a number of facts that may come as a surprise. For example:
- Canada now has the highest debt to income ratio among G7 countries, and Italy has the lowest.
- The countries with the highest levels of household debt per adult – Denmark, Norway and Switzerland – are among the wealthiest and most successful;
- Debt has risen significantly in developed countries over the past decade, but it is nowhere near the scale of the developing world, where almost every country has surpassed the global average of 45% growth during 2000–12.
- While a high ratio of debt to net worth does not itself signify a problem for a country, it does appear to send a warning signal when combined with rapid growth in household debt. Greece, Hungary and the United Arab Emirates fall within this category and all have had problems with debt in recent years. These problems were not directly related to household debt, but rapid growth in personal debt in a highly indebted country is perhaps indicative of a relaxed credit environment that may have wider implications.
- Contagion in the Eurozone links Ireland, Italy, Portugal and Spain with the problems in Greece. Our estimates of household assets and debts suggest that Greece is an outlier among Eurozone countries, and that the other countries are better placed to absorb the rise in government debt. However, the deterioration in Ireland’s position since 2008 remains a source of serious concern. Beyond the Eurozone, Hungary and Romania are the countries that need to be most carefully monitored.
Via Credit Suisse:
Rising household debt has been one of the most enduring and widespread economic trends of the past 30 years. Evidence for G7 countries suggests that this phenomenon began around 1975. Before this date, the ratio of household debt to annual disposable income within countries remained fairly stable over time and rarely rose above 75%. By the year 2000, household debt in Canada, Germany, the UK and the USA was equivalent to at least 12 months’ income, and in Japan it equated to 15 months’ income (see Figure 1 below). Household debt in France and Italy started from a much lower base, but the gap narrowed considerably between 1980 and 2000, with the debt to income ratio approximately doubling in France and rising even faster in Italy. In most G7 countries, these trends continued until the financial crisis, and then moderated or reversed.
[28]
While the financial crisis prompted major debt reductions in the UK and the USA after 2007, the trend towards greater indebtedness has carried on regardless in Canada and Italy. Given its history and reputation for prudent economic policies, it is worth noting that Canada currently has the highest household debt-income ratio among G7 countries.
The regional composition of household debt is dominated by North America, Europe and Asia-Pacific countries (excluding China and India), which together account for 94% of the global total.
Average debt per adult shows even greater variation across countries than average income or average wealth. The highest levels of debt per adult are found in developed countries with well functioning institutions and sophisticated credit markets.
[29]
Based on average USD exchange rates since 2000, Denmark, Norway and Switzerland top the league table for household debt per adult in 2012, with values above USD 100,000 (see Figure 4 above). This is roughly twice the level seen in Canada, Sweden, the USA, the UK and Singapore, with Ireland and the Netherlands sitting between the two groups. By these standards, the average debt per adult in Spain (USD 31,200), Portugal (USD 25,800), Italy (USD 23,900) and Greece (USD 19,000) looks quite modest.
Figure 4 also shows that average debt per adult increased during 2000–07 in all the high debt countries apart from Germany, where average debt has been flat, and Japan, where household debt has declined – possibly due in part to the ageing population, given the negative relationship between debt and age. Countries with the highest debt per adult showed little tendency towards debt reduction in the aftermath of the financial crisis: Ireland, the USA and Hong Kong are the main exceptions. Apart from Germany and Japan, only Hong Kong and Singapore have debt levels in 2012 which are close to the levels recorded at the start of the millennium.
Expressed as a fraction of net worth, household debt is typically 20%-30% of wealth in advanced economies, but much higher levels are sometimes recorded, for example in Ireland (44%), the Netherlands (45%) and Denmark (51%).
[30]
The burden attached to the rise in household debt needs to be evaluated in the context of the substantial increase in personal wealth during the past decade. Despite the rise in wealth, in most countries where household debt exceeds USD 1 trillion, the ratio of debt to net worth rose on average by about 50% during the period 2000–08 (see Figure 5 above). Debt in the USA increased from 18.7% of net worth in 2000 to peak at 30.5% in 2008 before falling back to 21.7% in 2011. The UK exhibited a very similar pattern, with the debt ratio climbing from 15.2% to 23.4% between 2000 and 2008, subsequently dropping to 20% in 2012.The rise in the debt-wealth ratio was even more precipitous in the Netherlands and Spain, and although the increase abated slightly to 71% in the Netherlands, no reduction is evident in Spain, whose ratio is now 90% higher than it was in 2000.
In the developing world, the absolute level of debt is seldom more than USD 1,000 per adult, but exceptionally high levels – above USD 5,000 per adult – are evident in Brazil, Chile and South Africa
[31]
...the biggest changes were recorded in other transition countries: Russia, where average debt increased by a factor of 20 between 2000 and 2007; and Romania and Ukraine, where average debt has seen a fiftyfold increase since 2000 (see Figure 7 below).
[32]
The fact that the wealthiest and most economically successful countries tend to have relatively high levels of household debt suggests that debt is both a blessing and a curse. The problem is understanding how much household debt is needed to oil the wheels of economic progress without precipitating the crises of confidence seen recently in several European nations. Table 1 attempts to cast some light on this issue based on the cross-classification of countries according to their debt-wealth ratio and growth in debt per adult.
[33]
Several patterns are evident.
First, high-income economies congregate in the upper left section of the table: in other words, they tend to have medium or high levels of household debt relative to assets, and low to medium debt growth in recent years.
A second feature is the high growth in debt witnessed in most transition countries in recent years.This is not surprising given the lack of investment opportunities and credit and mortgage facilities in the pre-reform era. What is perhaps unexpected is the speed at which Hungary, Poland, Slovakia and Ukraine have joined the group of countries for which household debt exceeds 20% of net worth.
What is problematic is the speedy growth in household debt. It is worth noting that Greece, Hungary and the United Arab Emirates all appear in the upper right-hand section and all have made headlines in recent years with regard to debt problems. While these headline issues have not been directly linked to household borrowing, the high speed at which household debt has grown is perhaps indicative of a relaxed credit culture that can have further repercussions.
In almost all countries, government liabilities exceeded government financial assets in 2011, leaving the government a net debtor.
[34]
With the regular occurrence of sovereign debt crises, relatively little attention has been given to the parallel issue of personal debt. Yet household debt has transformed over the past 30 years from low level borrowing mostly securitized on housing assets into wholesale credit seemingly available to anyone for any purpose.