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SEVEN years after the 2008 global financial crisis, global debt has grown by US$57 trillion, posing new risks to financial stability. Despite this, many countries have yet to engage in deleveraging.
A recent report by McKinsey Global Institute, the business and economics research arm of multinational management consulting firm McKinsey & Company, pinpoints three areas of particular risk to financial stability ahead: the rise of government debt to record-high levels, the continued rise of household debt to new peaks especially in Northern Europe and some Asian countries, and the quadrupling of China's debt over the last seven years.
Government debt has grown by US$25 trillion since 2007. As starting deleveraging would require implausibly large increases in real GDP growth or unreasonably deep reductions in fiscal deficits, governments may need to look to new and innovative ways to reduce their debt. These may include greater government productivity, more extensive asset sales, taxes and more efficient debt restructuring programmes.
Another cause for concern is rising household debt that has been fuelled by mortgages and rising house prices. In many countries, household debt-to-income ratios have even exceeded the peak ratios seen in the crisis countries before 2008. To safely manage high levels of household debt, more flexible mortgage contracts, clearer personal bankruptcy rules, as well as tighter lending standards and macroprudential rules are needed.
China, in particular, faces the growing threat of financial instability with its rising debt levels. Its debt as a share of GDP has surpassed those of the US and Germany. The world's second-largest economy has seen a near quadrupling of its total debt from US$7.4 trillion in 2007 to US$28.2 trillion by mid-2014. This has been exacerbated by its rapid growth and the complexity of shadow banking, and off-balance sheet borrowing by local governments.