Illustration by Ajay Mohanty
Global consulting firm McKinsey has published a report on what has changed in the world economy a decade since the financial meltdown that hit markets worldwide. The report is centred around debt, the linchpin of the collapse of the American banking system that started with the bankruptcy of Lehman Brothers. It contends that banks are more highly capitalised today, and less money is sloshing around the global financial system as central banks, regulators, and policymakers were forced to take extraordinary measures after the 2008 crisis.
Here are the five observations the paper made:
1. Global debt has increased by leaps and bounds:
Contrary to expectations, debt
continued to grow. However, it has been led by government borrowing across the world. The report says that the combined global debt
of governments, non-financial corporations, and households has grown by $72 trillion since the end of 2007.
Interestingly, advanced economies have bought debt
heavily. China accounts for more than a third of global debt
growth since the financial meltdown.
2. A developing risk?
Corporate borrowings have doubled over the past decade to hit $66 trillion in mid-2017. This has been facilitated by an era of really low lending rates administered by central banks around the world. However, most of the corporate debt
can be attributed to companies in developing countries. This might turn out to be a risky affair as emerging market currencies take a beating, especially after the Turkish lira's recent downward spiral.
3. Households have reduced debt, but many are far from being financially well off
Subprime loans or home loans that had a high probability of being defaulted caused the great meltdown in 2008. US households have reduced their debt
substantially since. Household debt
is similarly down in Europe.
But, in countries such as Australia, Canada, Switzerland, and South Korea, household debt
is now substantially higher than it was prior to the crisis, and is higher in Canada as a percentage of GDP, than it was in the United States in 2007.
4. Banks are safer but less profitable
The report notes that globally banks hold less liquid assets today. In the past decade, most of the largest global banks have reduced the scale and scope of their trading activities (including proprietary trading for their own accounts), thereby reducing exposure to risk.
It specially mentions the mounting non-performing assets of Indian banks that have been a 'drag on the banking system'.
5. The fear of the unknown
The report concludes that apart from rising developing-nation corporate debt, China's rapidly rising debt
burden, real-estate bubbles and mortgage
risk, there are some more issues that may threaten the stability of the world economy in the future.
'The world is full of other unknowns', the authors write. For example, high-speed algorithm trading can cause 'flash crashes'. Cryptocurrencies, rising geopolitical tensions, the concept of free trade, nationalist sentiments
are some of those unknowns that the economy should be alert to.
The report ends on a cautious note, "...the next crisis will not look like the last one. If 2008 taught us anything, it’s the importance of being vigilant when times are still good."