China, Europe and the Netherlands: Opportunity Is Knocking at Our Doors

Apr. 2015 
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Canada: Debt and output growth, 5-year ma
C$ debt/extra C$ GDP
Source: Oxford Economics/Haver Analytics, BIS
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
210
180
150
120
90
60
30
0
Non-financial private sector debt/GDP ratio, rhs
Incremental non-financial sector debt/GDP, lhs
1967     1972    
1977
1982     1987
1992     1997     2002     2007
2012
Relative to their current levels, interest rates are still 
more likely to rise than to fall over the medium term.) 
Banks’ balance sheet
If the relative importance of housing loans in banks’ 
balance sheets diminishes, one of two things must hap-
pen. Either banks’ balance sheets will grow less rapidly, 
or the composition of assets has to change, with some 
other asset growing in importance. Judging by devel-
opments since the financial crisis began, the more like-
ly development is an increased relative importance of 
(mainly) short-term government paper (T-Bills in the 
US case). 
This should be good news for banks. One of the key 
developments that made the banking system more 
fragile in the run-up to the crisis was the erosion of 
banks’ holdings of cash and instruments that could be 
(almost instantaneously) transferred into cash. This 
change is understandable, since neither cash, nor near-
cash instruments, provide much of an attractive return. 
However, they do provide safety, which once again is a 
crucial consideration. 
The role of banks
A further consequence for banks is that their role 
is likely to evolve. If credit plays a smaller role in the 
economy than hitherto banks may shift towards more 
investment banking and private equity-like activity. 
In turn, this is likely to lead to a further development 
of shadow banking. Whether this means greater finan-
cial instability or not will ultimately depend on how 
financial regulators react to this development.
The rate of growth
Can we really have growth that is not debt-induced? 
Judging by history, certainly. Economies can grow 
without credit growth at all and they can grow with 
lower credit growth than we have seen over the 15-20 
years to 2008. They can even grow strongly. In fact, we 
can go further: The chart below shows that the long-
term average of real GDP growth was faster when the 
incremental debt/GDP ratio in the non-bank private 
sector was lower. There will have been other factors in 
play. But the numbers do indicate that non-debt in-
duced growth does not have to mean slower growth. 
Australia: Debt and output growth, 5-year ma
A$ debt/extra A$ GDP
Source: Oxford Economics/Haver Analytics, BIS
3.0
2.5
2.0
1.5
1.0
0.5
0.0
210
175
140
105
70
35
0
Non-financial private sector debt/GDP ratio, rhs
Incremental non-financial sector debt/GDP, lhs
1969
1974
1979    
1984
1989    
1994    
1999    
2004
2009
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Macro Economy 
034 
  Apr. 2015
Sweden: Debt and output growth, 5-year ma
SEK debt/extra SEK GDP
9
8
7
6
5
4
3
2
1
0
270
240
210
180
150
120
90
60
30
0
1967     1972
1977
1982     1987
1992  1997     2002     2007
2012
Non-financial private sector debt/GDP ratio, rhs
Incremental non-financial sector debt/GDP, lhs
Source: Oxford Economics/Haver Analytics, BIS
This article has used the U.S.A. as an example, be-
cause the US data is the most readily available and goes 
back to the early 1950s. For other countries, we use 
data from the BIS, which usually begins in 1960 but 
ends in 2012.
The experience of other countries varies. The charts 
show a division in three groups. The first group – Japan, 
the U.K. and Australia – parallels the experience of 
the U.S. The second group – e.g., Canada and Sweden 
– began to deleverage, but has returned to taking on 
more debt. The third group (e.g. France) had by 2012 
not yet begun to deleverage.
The experience of the latter two groups raises the 
question why they are different. There are a number 
of different possible answers, although none of them 
is fully satisfying. One could be that the debt build-up 
only took off after the Great Recession, when interest 
rates had fallen to rock-bottom. By contrast, the debt 
build-up in the U.S., the U.K. and others occurred at 
higher interest rates. If correct, the countries where 
leveraging is still going on, are storing up problems for 
the day when interest rates begin to rise.
Another possible explanation is that households 
with a higher savings ratio can sustain higher debt than 
households with a lower savings ratio.
It could also be that higher asset prices help off-set 
higher debt. But this is not a complete answer either, 
because houses (the key household asset) do not gener-
ate an income stream from which debt can be serviced.
Rapidly rising debt would also be more sustainable 
if the initial debt level was low. However, a quick look 
at the charts at the end shows that there is no clear pat-
tern supporting this thesis.
It may also be that there is no simple maximum 
sustainable debt ratio. Michael Pettis, Professor at the 
Guanghua School of Management at Peking University, 
has repeatedly made the point that, at least in the case 
of government debt, debt becomes unsustainable when 
it is suddenly deemed to be unsustainable. This may be 
true of the private sector as well. 
France: Debt and output growth, 5-year ma
€ debt/extra € GDP
Source: Oxford Economics/Haver Analytics, BIS
6
5
4
3
2
1
0
180
150
120
90
60
30
0
Non-financial private sector debt/GDP ratio, rhs
Incremental non-financial sector debt/GDP, lhs
1977
1982
1987
1992
1997
2002    
2007    
2012
s
 Other countries’ experience
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