Category Archives: Debt crisis

8/3/20: Global Economy’s Titanic: Meet Your Iceberg


Here's that iceberg that is drifting toward our economy's Titanic... and no, it ain't a virus, but it is our choice:

Via: @Schuldensuehner

Years of easy credit, easy money. The pile of debt from Baa to lower ratings is the real threat here, for its sustainability is heavily contingent on two highly correlated factors: cost of debt (interest rates) and availability of liquidity. The two factors are closely correlated, but are also somewhat distinct. And both are linked to the state of the global economy.

There are additional problems hidden within A and even Aa rated debt, since these ratings are vulnerable to downgrades, and current Aa rating shifting to Baa or Ba will entail a discrete jump in the cost of debt refinancing and carry.

14/7/18: Elephants. China Shop, Enters a Mouse: Global Debt Bubble


Bank for International Settlements Annual Report for 2018 has a very interesting set of charts covering the growing global debt bubble, one of the key risks to the global economy highlighted in the report.

First, levels:

  • Global debt rose from 179% of GDP at the end of 2007 to 217% at the end of 2017 - adding 38 percentage points to the overall leverage carried by the global economy.
  • The rise has been more dramatic for the Emerging Economies, with debt levels rising from 113% of GDP to 176% between the end of 2007 and the end of 2017, a net addition of 63 percentage points.
  • Advanced economies faired somewhat better, posting an increase from 233% of GDP to 269%, a net rise of 36 percentage points.
  • As it stood at the end of 2017, Global Debt was well in excess of x3 the Global GDP - a degree of leverage not seen in the modern history.


As noted by BIS: “...financial markets are overstretched, as noted above, and we have seen a continuous rise in the global stock of debt, private plus public, in relation to GDP. This has extended a trend that goes back to well before the crisis and that has coincided with a long-term decline in interest rates".


Next, impacts of monetary policy normalization:

As the Central Banks embark on gradual, well-flagged in advance and 'orderly' overall rates and asset purchases 'normalization', the global economy is likely to bifurcate, based on individual countries debt exposures. As the chart above shows, impact from a modest, 100bps hike in rates, will be relatively significant for all economies, with greater impact on highly indebted countries.

Per BIS: "Since the mid-1980s, unsustainable economic expansions appear to have manifested themselves mainly in the shape of unsustainable increases in debt and asset prices. Thus, even in the absence of any near-term market disruptions, keeping interest rates too low for too long could raise financial and macroeconomic risks further down the road. In particular, there are reasons to believe that the downward trend in real rates and the upward trend in debt over the past two decades are related and even mutually reinforcing. True, lower equilibrium interest rates may have increased the sustainable level of debt. But, by reducing the cost of credit, they also actively encourage debt accumulation. In turn, high debt levels make it harder to raise interest rates, as asset markets and the economy become more interest rate-sensitive – a kind of “debt trap”."

Thus, the impetus for rates and monetary policies normalisation is the threat of continued debt bubble inflation, but the cost of such normalisation is the deflation of the debt bubble already present. In other words, there's an elephant and here's the china shop.

"A further complication in calibrating normalisation relates to the need to build policy buffers for the next downturn. Indeed, the room for policy manoeuvre is much narrower than it was before the crisis: policy rates are substantially lower and balance sheets much larger". And here's the mouse: cyclically, we are nearing the turning point in the current expansion. And despite all the PR releases about the 'robust recovery' current up-cycle in the global economy has been associated with lower growth rates, lower productivity growth, lower real investment (as opposed to financial flows), and more debt than equity (see http://trueeconomics.blogspot.com/2018/07/14718-second-longest-recovery.html).

In other words, things are risky, but also fragile. Elephants in a china shop. Enters a mouse...

21/1/18: FT Warns on Credit Cards Delinquencies: High or Hype?


The FT are reporting a 20% rise in credit cards delinquencies across major U.S. banks in 2016, compared to 2017 (see here: https://www.ft.com/content/bafdd504-fd2c-11e7-a492-2c9be7f3120a). Which sounds bad. Although, of course, neither new nor completely up-to-date. That is because the NY Fed give us the same figures (for all U.S. households) through 3Q 2017.

So here is the analysis of the Fed figures:
Despite these worrying dynamics, the levels of delinquencies are still low. In 2007-2008, credit card delinquencies rates were around 9.34% and 10.84%, respectively. In 2006, these were 8.54%. In fact, current running average for 1Q-03Q 2017 is 6.14% or lower than for any year between 2003 and 2012. 

As the chart below shows, the real crisis is currently unfolding not in the credit cards debt, but in Student Loans with 10.05% average delinquency rate for 2017 so far. Credit crds delinquencies are only fourth in terms of severity. 


In terms of total volumes of debt in delinquency, 3Q 2017 data shows credit cards with USD12.3 billion, against mortgages at USD88.56 billion, student loans at USD 30.16 billion and auto loans at USD 17.05 billion. 

Even in terms of transition from shorter-term delinquency (30 days-89 days) to longer-term delinquency (90days and over), credit cards are not as prominent of a problem as student loans:

In summary, thus, the real crisis in the U.S. household debt is not (yet) in credit cards or revolving loans, and not even (yet) in mortgages. It is in student debt, followed by auto loans.

21/1/18: Student Loans Debt Crisis: It Only Gets Worse


A new research from the Brookings Institution has shed some light on the exploding student debt crisis in the U.S. The numbers are horrifying (for details see https://www.brookings.edu/wp-content/uploads/2018/01/scott-clayton-report.pdf) (emphasis mine):

"Trends for the 1996 entry cohort show that cumulative default rates continue to rise between 12 and 20 years after initial entry. Applying these trends to the 2004 entry cohort suggests that nearly 40 percent may default on their student loans by 2023." In simple terms, even 12-20 years into the loan, default rates are rising, which means that after we take out those borrowers who are more likely to default (earlier defaulters within any given cohort), the remaining borrowers pool is not improving. This applies to the cohort of borrowers who entered the labour markets at the end/after the Recession of 2001 - a cohort that started their careers before the Global Financial Crisis and the Great Recession, and that joined the labor force at the time of rapid growth and declining unemployment.

"The new data show the importance of examining outcomes for all entrants, not just borrowers, since borrowing rates differ substantially across groups and over time. For example, for-profit borrowers default at twice the rate of public two-year borrowers (52 versus 26 percent after 12 years), but because for-profit students are more likely to borrow, the rate of default among all for-profit entrants is nearly four times that of public two-year entrants (47 percent versus 13 percent)." Which means that the ongoing process of deregulation of the for-profit education providers - a process heavily influenced by the Trump Administration close links to the for-profit education sector (see https://www.theatlantic.com/education/archive/2017/08/julian-schmoke-for-profit-colleges/538578/ and https://www.politico.com/story/2017/08/31/devos-trump-forprofit-college-education-242193)  - is only likely to make matters worse for younger cohorts of Americans.

On a related: "Trends over time are most alarming among for-profit colleges; out of 100 students who ever attended a for-profit, 23 defaulted within 12 years of starting college in the 1996 cohort compared to 43 in the 2004 cohort (compared to an increase from just 8 to 11 students among entrants who never attended a for-profit)." So not only things are getting worse over time on their own, but they will be even worse given the direction of deregulation drive.

"The new data underscore that default rates depend more on student and institutional factors than on average levels of debt. For example, only 4 percent of white graduates who never attended a for-profit defaulted within 12 years of entry, compared to 67 percent of black dropouts who ever attended a for-profit. And while average debt per student has risen over time, defaults are highest among those who borrow relatively small amounts." This highlights, amongst other things, the absurd nature of the U.S. legal frameworks governing the resolution of student debt insolvency: the easier/less costly cases to resolve (lower borrowings) in insolvency are effectively exacerbated by the lack of proper bankruptcy resolution regime applying to the student loans.

Some charts:

Data above clearly highlights the dramatic uplift in default rates for the more recent cohort of borrowers. At this point in time, borrowers from the 2003-2004 cohort already exhibit higher cumulative default rates than the previous cohort exhibited over 20 years horizon. Worse, the rate of increases in default rates is still higher for the later cohort than for the earlier one. Put differently, things are not only worse, but are getting worse faster.

And here is the breakdown by the type of institution:
For-profit institutions' loans default rates are now at over 50% and rising. In simple terms, this is a form of legislatively approved and supported debt slavery, folks.

Beyond the study, here is the latest data on student loans debt. Student loans - aggregate - transition into delinquency is highest of all household credit lines:

And the total volume of Student Loans debt is now second only to mortgages: