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Nitish Pahwa
McKinsey & Company, an international consulting firm, has released a report containing information on the debt of over 47 different countries. The numbers show that total global debt has increased by $57 trillion since the 2007 financial crisis, making current global debt a record high of $199 trillion. Debt is now 286 percent of global economic output, a 17 percent increase from what it was during the financial crisis. These figures expose weaknesses and trends present in all markets and countries, and also imply that many of these economies might be headed on rocky roads toward bankruptcy or severe crisis, affecting the economy on a global level. Here is a closer look.
Debt counted in the report is not just debt owed by countries' governments; it also includes debt owed by citizens, businesses, and institutions. Some countries are more heavily indebted in certain areas than others--for instance, most of Spain's debt is owed by its households, while much of Greece's debt is liable to its government. However, an important thing to note is that owing debt in one sector is not more or less favorable than owing debt in another sector; instead, it is equally damaging. Excessive debt in any part of a country's economy leaves that country's economy susceptible to troubles. In fact, debt in some countries is being considered "unsustainably high", especially in those countries with peaking government and household debt. Factoring this into calculating global debt shows that debt to output ratios have increased by large amounts in almost every major economy. In Japan, this ratio has increased to over 500 percent, making it the most indebted country in the world. China's ratio also has increased by 83 percent since 2007.
The analyses in the report show that the global economy has much to worry about. Such massive amounts of debt leave countries vulnerable to economic shocks and bubbles, potentially harmful enough to topple the world into another financial crisis. Certainly, GDP growth will slow down, markets will be affected, and policy changes will have to be enacted in order for debt to be reduced, such as asset sales, debt-restructuring programs, and effective lending and bankruptcy rules. It will be hard to reduce the total amount of global debt, but it is necessary to reduce the unsustainable rate at which it is growing in order to avoid another financial crisis.
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