Thoughts from our Property Experts

It's not deleverage - it's releverage times 1.4 and some of this cash has fuelled the London property boom

by Adrian Black Adrian Black, author of this post , Thursday 05 February 2015


Very interesting article today on the BBC based on reseach by McKinsey regarding debt growth since 2007 – it’s not surprising that a lot of the cash arising from this has found its way to buying London properties.

Key points

  • According to a new study by the influential consultancy McKinsey Global Institute, global debt has grown by $57tn (an increase of just over 40% in absolute terms) or 17 percentage points of GDP or worldwide income since 2007, to stand at $199tn, equivalent to 286% of GDP.

  • The single biggest contributor to the rise and rise of global indebtedness is that government debts have increased by $25tn over these seven years.



In a few short years, and largely as a result of an explosion in liabilities relating to property developments, local authority investment in infrastructure and "shadow banking" (or the activities of opaque institutions that mimic banks), China has gone from being one of the least indebted economies to one of the more indebted.

It is more indebted than Australia, the US and Germany.  

McKinsey argues that China's central government does have the financial capacity to cope with a fully fledged financial crisis. It calculates that even if half of property related loans defaulted and lost four-fifths of their value, any financial rescue would see government debt rising to around 79% of GDP - which would be roughly equivalent to the UK's current public-sector indebtedness.



McKinsey's analysis relates to how difficult it will be for a number of rich countries to reduce high levels of government debt.

It singles out Spain, Japan, Portugal, France, Italy and the UK as all needing to shrink their public sector deficits by around 2% of GDP if they are to have any chance of reducing their indebtedness. But as McKinsey says, if these governments were to make the necessary cuts or tax increases, that could turn out to be self-defeating, by impairing economic growth.

McKinsey adds that the real rate of GDP growth in these countries would need to double from current forecast, for debt-to-GDP ratios to start falling in Spain, Japan, Portugal, France, Italy and Finland.

Recent forecasts have revised down projected growth rates for the global economy - implying that these economies will not be able to rely on economic recovery to help them ease the burden of debt.

That means, McKinsey says, that useful reductions in public sector indebtedness may require sales of assets (privatisations), higher or one-off wealth taxes, a more permissive approach to inflation (since debt becomes more affordable when nominal incomes rise) and "more efficient programmes of debt restructuring".


What we See

Higher taxes are the most likely outcome – and these are likely to be on assets (after all the money priming the economy from Governments has driven asset price rises and so it would be a logical way of getting the money back).  Governments’ debt burdens require them to keep interest rates low and for this to happen inflation needs to be kept low too.


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