(De)Leveraging: A Mixed Picture

December 09, 2014

Washington, D.C., December 9, 2014 - Despite considerable deleveraging by mature market financial sectors, debt-to-GDP ratios of most non-financial sectors are continuing to increase globally, totaling more than 240 percent by mid-2014, according to the latest Capital Markets Monitor by the Institute of International Finance.

"We are seeing different developments in debt levels among mature and emerging markets and among different sectors," said Hung Tran, executive managing director at the IIF. "Sustaining such high levels of debt will make it difficult to issue new debt to sustain economic growth, and to refinance existing debt in a more normalized monetary policy environment."

The IIF noted that among mature market countries (U.S., UK, continental Europe and Japan), the financial sector reduced its indebtedness by 20 percent of GDP since 2009Q1. The U.S. and UK financial sectors drove this deleveraging by 38 and 22 percent, respectively. ' Mature market public sector, however, has increased its debt-to-GDP ratio by 30 percent in aggregate.

Emerging markets generally increased leverage, in some cases quite significantly. The IIF noted that the most striking development has been the sharp increase in indebtedness by the non-financial corporate sector in almost every emerging market country it analyzed. Emerging market non-bank corporates have raised around $1.6 trillion since 2009 and around 30 percent of that ($485 billion) was raised in international markets.

The IIF warned that the substantial increase in non-financial sector debt has worrisome implications:

  • From such high levels, it will be difficult to create new debt at a pace sufficient to support vigorous growth on a sustained basis;
  • The debt service burden and default risk will rise as monetary conditions normalize-in some cases potentially leading to stress.
  • High and rising debt levels amidst slow growth and low inflation is not a sustainable proposition-the divergence will have to be closed at some point.

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The Institute of International Finance is the global association of the financial industry, with close to 500 members from 70 countries. Its mission is to support the financial industry in the prudent management of risks; to develop sound industry practices; and to advocate for regulatory, financial and economic policies that are in the broad interests of its members and foster global financial stability and sustainable economic growth. IIF members include commercial and investment banks, asset managers, insurance companies, sovereign wealth funds, hedge funds, central banks and development banks. For more information visit www.iif.com.'

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