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64 Deleveraging, What Deleveraging Figure 4.23 Eurozone countries’ household and corporate debt 130 120 110 100 90 80 70 60 50 40 30 20 10 0 A. Private debt - household (% of GDP) Germany Spain Greece Ireland France Italy Portugal 01 02 03 04 05 06 07 08 09 10 11 12 13 170 160 150 140 130 120 110 100 90 80 70 60 50 40 B. Private debt - corporate ex-financials (% of GDP) Germany Spain Greece France Italy Portugal 01 02 03 04 05 06 07 08 09 10 11 12 13 Source: Authors’ calculations based on national accounts data. Figure 4.23 shows that non-financial corporates also accrued extra debt during 2003-07, but with the exception of France, this has stabilised since the crisis. 25 Taken together, Section 4.2.2 has shown that the legacy of the crisis for the euro periphery is very high levels of sectoral debt and net external debt. Consistent with the overall themes of this report, these debt overhangs represent a substantial drag on the potential growth performance of this group. In addition, it renders the group vulnerable to the normalisation of global long-term interest rates and exposed in the event of a future disruption in international financial markets. 25 The sharp increase in the debt of non-financial corporates in Ireland since 2007 can be explained by the tax-driven financial engineering activities of the domestic affiliates of global firms, and is not matched by local firms.
Case studies 65 4.3 Emerging markets: The next crisis Emerging economies were resilient to the 2008 financial crisis, but rising leverage is a concern Compared to developed economies, the group of emerging economies was less vulnerable to the global financial crisis that took hold in 2007-08. This was no accident – in the wake of the 1990s emerging market crises, these countries took steps to limit debt levels. At the external level, aggregate net financial flows to emerging economies contracted (and turned into net outflows for a substantial number of countries), while the composition of external liabilities also shifted away from debt-type liabilities to equity-type liabilities (Lane and Milesi-Ferretti, 2007; Lane, 2013). In addition, these countries also accumulated large stocks of foreign currency reserves, providing liquidity against the risk of a funding shock in foreign currency markets. The result was that many of these countries accumulated long net foreign currency positions, with foreign currency assets in excess of foreign currency liabilities, which was radically different to the 1990s situation (Lane and Shambaugh, 2010). The counterpart to this more cautious approach to taking on external debt was also a much more modest expansion in domestic credit during the pre-crisis period. The lower vulnerability of emerging economies to the global financial crisis (and their faster subsequent recovery) provides an important lesson in terms of the advantages of maintaining a prudential approach to debt levels. However, developments since 2008 have led to concerns about increasing leverage in some of these countries. Along one dimension, a number of emerging economies reacted to the global crisis and the consequent slowdown in exports by switching from export-led growth to domestically led growth, engineered by a strong expansion in domestic credit, most noticeably in China. Along another dimension, the super-low interest rate environment in advanced economies has encouraged a new wave of debt issuance by firms in emerging economies. In contrast to the mid-2000s phase, this new wave of global liquidity has been primarily intermediated through the bond market rather than the international banking system (Shin, 2013). The result was the strong increase in the ratio of total debt (ex-financials) to GDP for emerging economies, by a staggering 36% since 2008. Higher leverage, although helping to shield these economies from the chilling wind blowing from advanced economies, is an increasing concern in terms of the future risk profile given the ongoing steep slowdown of nominal growth, which reduces the ‘debt capacity’ of emerging economies exactly when they would need to expand it (see Chapter 3). Moreover, a substantial proportion takes the form of offshore issuance through the foreign affiliates of domestic corporations (Bruno and Shin, 2014). These offshore liabilities pose an indirect risk to domestic financial stability in emerging markets, since a disruption in offshore funding would compromise the consolidated financial health of the issuing corporates, damaging economic
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Geneva Reports on the World Economy
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International Center for Monetary a
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International Center for Monetary a
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Acknowledgements We thank Susan Lun
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List of Conference Participants Edm
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List of Conference Participants xii
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Foreword Since 1999 the Geneva Repo
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