Economics 01/05/2010: World Debt Wish 1

The last two weeks have thrown into the spotlight the reality of the troubled global economy we will be facing for years to come. This reality comes not the courtesy of the reckless banks and excessively greedy speculators. Instead, the 'new normal' is being powered by the same agency that many have come to see as the agent of salvation to the excesses of the private markets - the state.

By all numbers, world's largest governments are now broke. Insolvent and unable, due to political paralysis, to deal with the problem they face. This problem is compounded by the fact that in addition to the governments, the real economies are also broke. Unable to bear the weight of massive debt accumulated during 2003-2007 period, plus the expected burden of the government debts. The banks might have started the process over the period of 2006-2007, but before they did so, world governments were firmly on the path of unsustainable financing. The follies promoted and financed by the public purses in the developed world, which consumed hundreds of billions of taxpayers money, included a wide range of activities - from expansions of the public sector, to vast subsidies on environmental measures (most going to the least verifiable activities aimed at combating climate change instead of basic research, new technology development and investments in quality of life improvements), to pie-in-the-sky global economic development agendas and third world debt workouts. Geopolitical grandstanding, from aspirational 'democratization' to fictional 'unifications' also contributed significantly to the problem.

Now, the very economies that jostled for the positions of global power are suffering from debt overhang. And yet, rhetoric has not changed. Like a shopaholic unable to stop pulling out his credit card at every till in a shopping mall, world's leading economies cannot resist the temptation of vastly expanding public expenditure. In short, the governments around the world are now clearly exhibiting the same pattern of addictive behavior toward debt as a heroin junkie. The world has a debt wish!

Symptoms first. I took 36 countries data from the joint IMF/BIS/World Bank database on external debt positions - these countries represent world's largest debtor nations. Here are the charts (note, I will be publishing these charts over a number of posts in the next couple of days, so do come back for more).
The first chart above shows the overall composition of the total debts held by the world's largest 36 debtor nations. There are several apparent trends shown in this data:

1. Government borrowing did not accelerate dramatically during the current crisis. Instead, the entire government debt was showing clear pro-cyclical pattern during the boom years 2003-2007. In other words, the junkie was out for a fix well before the crisis hit.
2. Only in 2006-2007 did the banks managed to expand significantly their borrowing.
3. Globally, this cumulated banks debt mountain remains largely unaddressed despite a very significant contraction in banks-held debt from the peak. In other words, for all its destructive power, the crisis failed to bring banks debt balances back in line with pre-bubble levels of, say 2003-2004.
4. Global debt now stands dangerously close to the bubble peak.

A closer look at banks and governments
The following facts arise from the above chart:

1. Private sector debt globally falls below banks sector debt (see below for the case of Ireland).
2. Private sector debt deleveraging basically did not take place during the current crisis with non-banks and non-sovereign levels of debt remaining static close to the peak of Q4 2007.
   

Thus, world's largest debtors (and incidentally largest economies) remain exceptionally weak when it comes to their real economic activity reliance on debt financing.

And now on to Ireland:
The country that, according to the Government, has done so many things right in 2009 has... well:

1. Managed to virtually completely avoid any deleveraging in the current crisis, with our debt levels remaining at the peak levels attained (remember - all of the world peaked in debt levels back in Q4 2007) in Q4 2008.
2. There has been a marked increase in the rate of accumulation of government debt in Ireland in 2008-2009, again in departure from the world experience.
3. Irish banks have experienced steady deleveraging since Q4 2007 although this process is still to weak to return them to the healthier levels of 2003-2004.
4. Irish households and the rest of the real economy in Ireland have actually accumulated a debt mountain greater than our banking sector - a position that is different from the rest of the world.
   
5. There has been no deleveraging in the real economy, which continues to increase overall indebtedness.

In short, Irish debt position is deeply sicker than that of the rest of the largest debtor nations.

At this junction, data calls for some comparative analysis of the various debtor nations. This will be the subject of my next post on the topic. Tune in...