More than seven years have passed since the beginning of the financial crisis. Experts agree that the crisis was to a significant degree caused by too much leverage of both private households and governments. You’d think that this should have changed over the past few years. Unfortunately, you’d be horribly mistaken. A recent study published under the heading „Debt and (not much) deleveraging“ by the McKinsey Global Institute examines the evolution of debt levels across 47 countries and comes to a frightening result: Global debt levels have grown by $57 trillion since 2007. What’s more, all 22 developed countries in the sample „today have higher levels of borrowing relative to GDP than they did in 2007“. At the same time, the ratio of debt to GDP increased by 17 percentage points across the entire sample of 22 developed and 25 developing countries. McKinsey therefore warns that debt levels that outpace GDP growth pose „new risks to financial stability and may undermine global economic growth.“
Bad news from governments and households, good news from the financial sector
The study points out three major areas that must be tackled in the coming years, namely the increase in government debt, the rise of household debt, and specifically the debt levels in China, which quadrupled from $7 trillion to $28 trillion in just seven years. The researches are convinced that neither the deep fiscal adjustments nor large increases in GDP growth that could help the six most indebted countries to deleverage to a reasonable level will materialize. As a result, they suggest unconventional approaches such as „extensive asset sales, one-time taxes on wealth, and more efficient debt-restructuring programs“. They refrain from any statements how realistic they deem these measures to be implemented. It might come as a surprise to some, but the financial sector provides some of the good news in the study because it has not only deleveraged but also managed to decrease the most damaging elements of shadow banking. At the same time, new players enter the market and provide credit to corporates, thus filling the gap that banks bound by stricter regulatory regimes leave behind. Policy makers should therefore consider the measures they took when deleveraging the financial sector, evaluate, learn and adapt them accordingly to tighten the grip on government indebtedness.
Debitos helps banks and corporates to deleverage quickly
One of the unconventional measures that the McKinsey researchers mention could be our online-platform for trading non-performing loans. It helps banks and corporates alike to reach several goals in the NPL divestiture process: Speed, transparency and a significantly lower cost in reducing their non-performing loan books. This is achieved by auctioning off all NPL-portfolios in a real-time bidding process that increases competition and pushes transaction prices up. While sellers reach more than 280 qualified investors on Debitos, they can also opt for a closed bidder group, inviting only a selection of buyers to the due diligence and placing their bids on the NPL-portfolios offered. This allows sellers to control the entire process through the platform instead of having to coordinate all parties individually. A smart way to deleverage if speed (to fulfill regulatory requirements) is of the essence.