Beyond Greece: The Global Debt Monster

Even as the European Union and Greece came closer to a deal early this week, research suggests that Greece isn’t the only country to face a debt crisis.

Consultants McKinsey & Co. found that seven years after the global financial crisis, no major economies and only five developing countries have reduced their ratio of debt to GDP. In a report, “Debt and (Not Much) Deleveraging,” the consultants found that global debt has grown a monstrous $57 trillion since 2007.

McKinsey found that developing economies account for roughly half of the growth in debt, and in many cases that’s beneficial. But in advanced economies government debt has soared and private-sector deleveraging has been limited.

Global Debt Binge: A Crisis in the Making

Global Debt Binge

Source: McKinsey & Co.  Note: Figures reflect public and private debt 

At Global Income Edge our strategy helps insulate investors from debt crises and sudden reversals in growth. We’ve achieved this by focusing on a collection of companies that together are diversified across global markets and across products, and which have economies of scale, pricing power and a significant competitive advantage in their industries.

 And we’re keeping an eye on debt and adjusting out global investment strategy accordingly. Look to our next issue of Global Income Edge on July 13 for more details..  

 We’re not the only investment analysts to recognize the implications of what’s been happening in the Eurozone and elsewhere. Janus Capital Group’s Bill Gross, formerly PIMCO’s famed fund manager, said last week that Greece is the “canary-in-the-coalmine” for many developed economies. “Pensions, debt write-offs, fiscal policy austerity leading to low/no growth,” Gross wrote in a Twitter post.

 Clearly, higher taxes, which are widely expected in the coming years, would be a drag on growth. And various types of debt restructuring programs could chill various global fixed-income markets. Of course, the main problem is that at current growth levels, and with low inflation, there are few great options that can reduce debt quickly.

McKinsey calculates that the improvement in government budget balances required to start governments cutting debt is close to 2% of GDP or more in six countries: Spain, Japan, Portugal, France, Italy and the United Kingdom.

 And the consultants found GDP growth would have to be twice the projected rates or more to start reducing government debt-to-GDP ratios in six countries: Spain, Japan, Portugal, France, Italy and Finland.

 Meanwhile, in the U.S., former Fed Chairman Paul Volcker, in a recent report on state budgets, found that many states remain under heavy pressure.  

 State tax revenues, adjusted for inflation, “have barely recovered from their prerecession peaks,” Volcker wrote. Financial stress is tempting states to obscure their true financial position, and to “shift current costs onto future generations, and push off the need to make hard choices.”

 We think the global debt situation will eventually become untenable for many developed economies and eventually force potentially draconian, growth-stunting taxes, or severe debt restructurings that hurt fixed income investments.

 That’s why we continue to recommend global multinationals with investments in both developing and developed nations that are best positioned to bridge the growth gap and offer diversification among many countries.


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