Alarm bells sounded on rising gov’t, household debts

MANILA, Philippines - Government and household debts in advanced economies and emerging markets continue to grow, McKinsey Global Institute warned, noting very few have started deleveraging following the global financial crisis of 2008.

“The growing debt of the global economy is an unwelcome development seven years after the financial crisis began. It slows the recovery, raises the risk of new crises, and it limits the ability to respond to them,” Susan Land, partner at the McKinsey Global Institute, said in a statement.

“What’s been surprising is the rapid growth of private-sector leverage across a range of economies… At the same time, household debt has continued to soar in Northern Europe and in some Asian countries,” Land said.

In a report, McKinsey Global Institute, said global debt has increase by 40 percent to $199 trillion as of the second quarter of 2014 from $142 trillion in end-2007.

Governments account for the bulk of the debt at $58 trillion, while corporates followed with $56 trillion. Data showed the financial sectors held $45 trillion, while households accounted for the remaining $40 trillion.

“Developing economies account for roughly half of the growth, and in many cases this reflects healthy financial deepening. In advanced economies, government debt has soared and private-sector deleveraging has been limited,” McKinsey Global Institute said in the report.

The research firm stressed cutting government debt would require a “wider range” of solutions as this has ballooned by $25 trillion since 2007 and seen increasing further.

“For the most highly indebted countries, implausibly large increases in real GDP growth or extremely deep reductions in fiscal deficits would be required to start deleveraging,” McKinsey Global Institute said.

“A broader range of solutions for reducing government debt will need to be considered, including larger asset sales, one-time taxes, and more efficient debt restructuring programs,” the firm added.

Looking at the Philippines, the report said the government has reduced debt by three percentage points in early 2014 from 2007, while the financial sector has deleveraged by as much as five percentage points.

Households were also seen cutting debt by two percentage points, but corporates were found to have grown their debt by nine percentage points.

“Debt remains an essential tool for funding economic growth. But how debt is created, used, monitored, and when needed discharged, must be improved,” McKinsey Global Institute said.