Wednesday , June 16 2021

Global leverage, investigated | FT Alphaville

Despite the crisis's efforts to reduce debt, much remains to be said about it. 320 percent of global GDP, to be something more specific.

A new report from the macro wonks at HSBC Global Research landed in our inbox last week, containing all kinds of wonderful charts on the subject.

Here are three of the most interesting charts from the note.

Debt Service Conditions

The red bars show the effect of a percentage increase in the country's base rate on the percentage of household income currently used for debt service or the black dots. So in Finland, an interest rate increase of 100 points will drive the percentage of income on interest payments with 38 (or so) basis points, from 7.4 percent of revenues to 7.7 percent of revenues.

Two things stand out in this chart, and none of these are well adapted to the post-war story.

Firstly, some of the world's most stable economies, like Australia and Canada, are most sensitive to interest rates. The causes vary, but both Australia and Canada are exposed to the same global forces.

Australia, as Dan pointed out in August, has a softer housing market, after nearly two decades of rocket-damped growth:

In order to keep up with Joneses, the Australians need to make big loans to afford housing. Low global interest rates, and thus affordable mortgages, have only accelerated this trend. With the Fed rate, Australia's Reserve Bank is under pressure to follow. Last week, it held its cash price of 1.5 percent after warning about faster loan terms in October. The threat to family income is then acute with falling house prices and potentially higher funding costs.

Canada, another commodity producing nation, faces similar headwinds. It has also had a balloon building real estate market, partly driven by foreign investors money (mostly from China) and low prices. See this FT chart of Vancouver property prices against the United States neighbor Seattle:

Such risks are in abundance for those who are leveraged-long property in Australia and Canada.

The other related point of interest is how countries that are often perceived as economic laggards – especially the southern Mediterranean countries, such as Italy and Spain – are much less sensitive to interest rates. For all its national fingerprints on financial caution, the average German household spends a greater part of debt service than Italy.

Foreign debt, by country

Turkey and Argentina starred down economic collapse during the summer, partly due to the fact that the countries and its companies owe too much debt. But it was not just a debt, it was the debt of US dollars.

Since the dollar has strengthened about 10 percent against its peers since mid-February, the emerging markets have weakened. And since these local currencies brought fewer greenbacks, the repayment of this debt became much more difficult.

Of course, what was shown in Turkey and Argentina was partly self-inflicted. Turkish President Recep Tayyip Erdogan avoided economic orthodoxy and Argentina, understood to make (possibly) necessary tax cuts – but the volatility (which saw that Turkey's lira lost one third of its value this year and Argentina's peso, almost half) put growth markets to a greater extent on högvarning.

As dirty fears swept through global markets in August, a line was formed between them with and without piles of dollar-denominated debt. As HSBC's chart shows, not all emerging markets did not worry. About half of the debt in Argentina's non-financial business sector during the first quarter of this year was the dollar denominated. Mexico and Turkey also hold large shares.

China's debt burden, on the other hand, has been much more of a domestic issue. Although its non-financial business sector is weighed by GDP levels above 160 percent, only one fraction has been dollar-denominated. In addition, China's currency should be under pressure, the country has a $ 3tn mountain of foreign exchange reserves to stifle any problems. Turkey and Argentina have had very sparse pillows to fall back in relation to the size of their economies.

Growth, which is still pushing forward

For HSBC, these increased debt levels are not yet a systemic threat, as many countries still grow relatively quickly. In the arithmetic of debt calculation, if the denominator grows faster than the teller, it is no problem.

GDP data in the third quarter, analysts write, have been "stable" outside the euro area, and a direct breakdown of growth is not on the cards. What is more likely is a gradual growth decline, especially if the high of Trump's tax cuts are not followed by a more financial juicing stateside.

If the Federal Reserve accelerates its timeframe for faster rhythms, emerging markets could feel faster until investors move into higher return (and safer) US assets.

One last point HSBC looks at the other side of the country's balance sheets, that is, the assets that the debt is sufficient. Often, in the heated discourse over fiscal positions, commentators forget about the fact that debt is sometimes taken to fund assets. If we go back looking at global government assets minus the debt, according to HSBC, almost everyone is on a healthy ground. In other words, they hold a little equity.

That is, except Britain:

. . . In the absence of assets and large pension liabilities, the United Kingdom is the only country in the sample below where the level of net wealth is worse than the simple government debt statistics imply.

With a certain geopolitical event threatening the horizon, some would argue that this scenario is likely to get worse before it gets better.

Related links:
Chinese property, mapped – FT Alphaville
Since the crisis, a preference for debt markets over bank loans – FT Alphaville
A reminder that US dollars dominate – FT Alphaville

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