Is Private Debt Excessive?

Abstract

Private debt stocks have increased significantly around the world. As a by-product, several countries have accumulated large negative net international investment positions, while the debt overhang threatens potential growth. High debt also creates additional difficulties for policy makers, by affecting the channels of monetary policy transmission. Gauging the extent to which private debt is excessive helps to understand the risks to global financial stability and the policy challenges going forward. Accordingly, the current article proposes methodologies to benchmark the debt of non-financial corporations (NFC) and households by comparing debt-to-GDP ratios to a threshold beyond which the probability of a banking crisis becomes relatively high (prudential benchmark), borrowing from the literature on early-warnings, and to the level of debt that can be justified by economic fundamentals (fundamentals-based benchmark). The latter are computed on the basis of an empirical econometric analysis of the determinants of debt accumulation. The median prudential benchmark for NFC debt is around 85% of GDP, while for household debt it is about 55%. For fundamental-based benchmarks, the median lies at about 75% for NFCs and is close to 50% for households. Median corporate debt clearly surpassed both fundamentals-based and prudential benchmarks in the period 2007–2014. In contrast, median household debt has been consistently below its prudential benchmark, albeit quite close in 2010. However, household debt did exceed the fundamentals-based benchmark from 2007 to 2010. Both benchmarks can be used together in macroeconomic surveillance to assess debt from complementary perspectives.