Friday, January 22, 2010

Debt and deleveraging: the global credit bubble and its economic consequences

A report by McKinsey Global Institute

This analysis adds new details to the picture of how leverage grew around the world before the crisis, and how the process of reducing it could unfold. We find that
  • Leverage levels are still very high in some sectors of several countries--and this is a global problem, just a US one.
  • To assess the sustainability of leverage, one must take a granular view using multiple sector-specific metrics. Our analysis has identified ten sectors within five economies that have a high likelihood of deleveraging. 
  • Empirically, a long period of deleveraging nearly always follows a major financial crisis.
  • Historic deleveraging episodes have been painful, on average lasting six to seven years and reducing the ration of debt to GDP by 25%. GDP typically contracts during the first several years and then recovers.
  • If history is a guide, we would expect many years of debt reduction in specific sectors of some of the world's largest economies, and this process will exert a significant drag on GDP growth.