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AEEF_290413

AEEF_290413

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Deleveraging andglobal growth
A call for coordinated macroeconomic policies
Jean Pisani-Ferry (Bruegel), Sébastien Jean (Centre d’EtudesProspectives et d’Informations Internationales – CEPII); HelmutHauschild (Bertelsmann Stiftung), Masahiro Kawai (AsianDevelopment Bank Institute – ADBI), He Fan (Chinese Academyof Social Sciences – Institute of World Economics and Politics –CASS-IWEP), Yung Chul Park (Centre for East Asian Studies atKorea University).
Paper based on the Asia Europe Economic Forum conference of 21-22 January 2013
 
DELEVERAGING AND GLOBAL GROWTH • AEEF
RISING STOCK MARKETS
on both sides of theAtlantic and decreasing spreads on sovereignbonds in the euro area have rekindled hopesthat the advanced economies could soonstart contributing more robustly to globalgrowth. Judged by the level of the output gapsas currently estimated, many advancedeconomies continue to produce significantlyless than their potential (Figure 1).One of the key factors behind this persistentdemand shortfall is the remaining deleverag-ing that firms, households, sovereigns andbanks have to undergo. The financial crisis ar-guably changed attitudes regarding the safeamount of leverage. Many households in theUnited States and Europe were left with debtsthat they could not refinance, and many moreexperienced difficulties repaying them. Thishas deterred consumption and housing in-vestment. Many governments have seen pub-lic debt approach unsafe levels and somehave experienced difficulties accessing fi-nancial markets. For banks, regulatory re-quirements add to the private incentive todelever.Figure 2 illustrates the build-up in leverage be-fore the crisis. Clearly, rising debt was a wide-spread phenomenon in advanced countries.Total level of debt is useful in providing anoverall picture and can indicate fragilities. Ex-perience indeed shows that debt can moveacross sectors, especially if the state, actingas the ultimate guarantor, bails out banks sad-dled with non-performing loans to privateagents. Yet, to base the analysis on total debtlevels runs the risk of ignoring that ‘all debt isnot created equal’
1
. The distribution of debtacross different agents matters. A good ex-ample is Switzerland (not shown on Figure 2),which had relatively high total debt during theperiod but which is not considered (assump-tion: correctly) an especially vulnerable econ-omy. The reason is that a large part of the debtis held by high-income households that canbe expected to service their liabilities
2
.A second issue is whether financial sectordebt should be included in total debt. If it is,countries that serve as financial hubs, suchas the United Kingdom, necessarily featureelevated debt levels in comparison to othercountries. In normal times, this distorts com-parisons in the same way the location of amajor harbour that serves neighbouring coun-tries distorts foreign trade openness compar-isons. At the same time, the example of Ireland after the financial crisis shows that ex-cessive financial sector debt can pose a realthreat, which would favour of its inclusion
4
.Figure 3 shows the total amount of debtbroken down by sector in 2000q1 and
DELEVERAGING AND GLOBAL GROWTH
Paper based on the AEEF conference of 21-22 January 2013*
Figure 1: Estimated and projected output gaps of selectedeconomies (% of potential GDP)
Source: IMF WEO April 2013.
    Q
        1
  -
        1
    9    9
        0
    Q
        1
  -
        1
    9    9
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        1
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  -
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        1
  -
        1
    9    9    8    Q
        1
  -
        1
    9    9    9    Q
        1
  -
        2        0        0        0
    Q
        1
  -
        2        0        0        1
    Q
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  -
        2        0        0        2
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        2        0        0        4
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55
0%
5
00%4
5
0%400%3
5
0%300%2
5
0%200%1
5
0%100%
JapanUKKoreaUnited
 
StatesE
A-
4
Figure 2: Domestic private and public sector debt by country1
99
0q1-2012q2 (%/GDP)
Source: Bruegel calculations with McKinsey Global Institute data. We are grateful to MGI forgiving us access to their debt data. Note: EA-4 = France, Germany, Italy, Spain.
* The authors (and AEEFpartners) would like tothank the
Asia-EuropeFoundation
(ASEF) forsupporting the AEEFinitiative. The authors aregrateful to Erkki Vihriala forexcellent researchassistance.
 
DELEVERAGING AND GLOBAL GROWTH • AEEF
2012q2. It confirms the increase in debtlevels in all countries. During the period,Japanese non-financial corporations andhouseholds were the only two sectors in thewhole sample that decreased their leverage. Yet, this was more than offset by increasedindebtedness on the part of Japan’sgovernment.
Sectoral versus aggregate deleveraging
In order to assess the deleveraging processin key countries, Figures 4 and
5
break downthe evolution in sectoral debt, distinguishingtwo sub-periods: before the onset of financialcrisis (2000-200
7
) and after (200
7
-2012).Countries differ substantially in terms of therole of various sectors in the increase in totalleverage until 200
7
. In Japan, the main driverwas the government, in South Korea and theUS it was households, in the UK the financialsector and in the four large euro-area coun-tries (EA-4), financial and non-financial cor-porations played a quantitatively similar role.In the post-200
7
period all countries contin-ued to experience an increase in total debt.But they differed markedly in sectoral evolu-tions. In the US, the emphasis has been on pri-vate deleveraging, especially for households(Figure
5
). Aggregate debt increased by 20percentage points of GDP only, in spite of thesignificant increase in government debt.Korea has been the opposite case, with mostadditional debt coming from the private sec-tor. In the euro area and the UK, private debthas not decreased and government debt hasincreased substantially, in spite of the prioritygiven to fiscal consolidation. In Japan virtu-ally all the increase in debt has come from thepublic side.For the financial sector, it is striking that lever-age (defined here as debt-to-GDP) has in-creased most in the EA-4 and decreased onlyin the US
4,
5
. Although the UK still has by far thehighest financial debt, the US has decreasedleverage considerably to less than half thelevel in the EA-4.Based on measures such as unemploymentand GDP growth, the US has arguably
        2        0        0        0      q        1        2        0        1        2      q        2        2        0        0        0      q        1        2        0        1        2      q        2        2        0        0        0      q        1        2        0        1        2      q        2        2        0        0        0      q        1        2        0        1        2      q        2        2        0        0        0      q        1        2        0        1        2      q        2
FinancialGo
v
ernmentNonfinancial
 
corporatesHouseholds
6
00%
5
00%400%300%200%100%0
Japan Korea UK US
A
E
A+
4
Figure 3: Sectoral debt levels in 2000q1 and 2012q2 as a share of GDP
Source: Bruegel calculations with McKinsey Global Institute data.
Japan Korea UK US
A
E
A+
4
FinancialGo
v
ernmentNonfinancialcorporatesHouseholdsTotal1
5
0%100%
5
0%0%
-5
0%
-
100%
Figure 4: Change in private and public debt-to-GDP ratio 2000q1 to200
7
q1
Source: Bruegel calculations with McKinsey Global Institute data.
Japan Korea UK US
A
E
A+
4
FinancialGo
v
ernmentNonfinancialcorporatesHouseholdsTotal
8
0%
6
0%40%20%0%
-
20%
-
40%
Figure
5
: Change in private and public debt-to-GDP ratio 200
7
q1 to2012q2
Source: Bruegel calculations with McKinsey Global Institute data.

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