De-leveraging in Different Countries:“Cold”and“Hot”

Financial“alleviating burden”of developed economies

“Over-leveraging"is the root cause for international financial crises.After the occurrence of international financial crises,various main bodies made a lot of effort in de-leveraging in the family,enterprise,financial industry and government departments.However,the various developments were very imbalanced,often resulting in“cold"on one side and“hot"in the other.For instance,in the US private individuals step out of the shadow of crisis,families are nearing completion of the process of de-leveraging,enterprises and financial departments have substantially improved their balance sheet status,with debts reduced to below the long-term level.Statistics show that the financial deficits of the US Government have dropped from the post Second World War summit value of 10.1%to 4.1%in 2013.

Broadly speaking,leveraging means using a relatively small amount of capital to control a larger asset scale,through entering into debt,with an aim to enhancing profit-gaining capacity or buying power.

The US is the most typical consumption driven economy,with individual consumption accounting for about 2/3 of the GDP,and the government spending is also in general maintained at a high level.High spending needs to be supported by a high level of borrowing,and high leveraging is the basic characteristic of the US economic model.From the macro perspective in the US,the demands driven by the growth in individual consumption and government spending often exceed their capacity for domestic production,resulting in huge amounts of current account deficit.

The US's trade deficit grew from US$31.1 billion in 1991 to US$763 billion in 2006,when it was highest.This gap was mainly filled by the inflow of overseas capital,and the scale was equivalent to 25%of the GDP in the US at that time.This made the US the largest capital inflow country in the world.From this perspective,the US's mode of economic growth is a mode of growth driven by leveraging.The inner logic of the US economic model characterized by high leveraging is this—residents department and government department use high leveraging to realize high consumption and high spending,and the high leveraging from the financial department can lend support to this.

The outbreak and deterioration of subprime crisis in the US shows that huge risks are embedded in this economic model,and this problem is hard to solve.Hence the US is doing its very best to de-leverage in order to“off-load"the economy.

The process of de-leveraging includes two activities—one is to reduce the volume of debt,including selling assets and reducing consumption(increasing savings);and the other is income growth or raising the prices of assets.Take the US household sector as an example,in the process of de-leveraging,on the one hand it is realized in the constraints on the consumption of the people,and on the other hand it is reflected in the slow improvement in the labor market and the recovery of property prices.

In general,economic cycle is closely related to debt and leveraging cycle.In a typical economy,the leveraging cycle encompasses four stages.The first stage is the period of economic elevation before an economic crisis,with an increase in private department borrowing,with the rise in debt rate driving up the leverage ratio.The second stage is the initial stage after the economic growth has passed its summit,with the outbreak of crisis,private departments taking the initiative to reduce debt,resulting in the lowering of debt ratio.However,as the asset prices drop drastically,the leverage rate rises rapidly.The third stage is the cycle of economic decline,with private departments taking the initiative to de-leverage,resulting in the debt ratio and leverage ratio both declining.The fourth stage is when the economy reaches the abyss,credit loan starts to grow,with the debt rate rising.But when the asset prices grow under the expansionary monetary policy,private departments'asset quality will improve,but the leverage rate would drop.With the economic revival becoming more and more established,we will reenter the first phase of stepping up the leverage.

A number of indicators have shown that the de-leveraging process has approached its final stage for US household sector(see Figure 2.1).After 2009 the household sector leverage continued to drop,from the summit of 1.25 in early 2009 to 1.18 in the third quarter of 2013,similar to the 2002 level.

On the one hand,this is because asset prices rose after 2009,and on the other hand,this is also because household took the initiative to reduce their debts.In recent times the debts of household started to rise.More importantly,the household's home mortgage,car loans and credit cards also grew,showing that this time the debt increase is a general occurrence.In the environment of the super low interest policy,residents'consumption as the major driver of US's economic growth may start to increase steadily.In the short run,the leverage of the US residents department can still rise with support,and the demand for residents'credit loans are maintained at a relatively high level.

Meanwhile, non-financial enterprise debt has exceeded the level before the fi-nancial crisis. Similar to the household sector, the US non-financial enterprise departments' leverage started to drop since early 2009, but this is mainly driven by rising asset prices, rather than a drop in debt. In fact, benefiting from the su-per low interest policy of the US Federal Reserve Board, non-financial enterprisesin the US are issuing corporate bonds in large quantities. In the third quarter of 2013, the bond reserves of US companies reached US $ 6,300 billion,a 70% in-crease over 2007. If we look at debt from a broader perspective, in the past few years the percentage of debt in the GDP for non-financial enterprises in the UShas been constantly on the rise, and in 2013 the figure has returned to the 2008 level. Issuing bonds in large quantities has enabled enterprises to accumulate ade-quate liquidity, building a good foundation for future investment (see Figure 2.2).

At the same time,the asset-liab1i4lit0y00charts of financial enterprises have seen marked improvement.The financial c1r2is0i0s0has caused a remarkable drop in risk affinity in US financial institutions,an10d 0t0h0ey have become very prudent about increasing their debts.On the other hand,the post-crisis US Federal Reserve Board has injected a lot of liquidity into the b8000 anks through three rounds of QE.The major banks have deposited over US$6 20,00400 billion in the US Federal Reserve Board in the form of excess reserves.Meanwhile the change in the direction of regulatory policies has forced US banks to focus more on accumulating adequate high quality capital.Hence in the short term US financial institutions will continue to stay in the phase of de-leveraging.In Japan,the process of de-leveraging for non-financial enterprises is also nearing its end.The debts incurred by non-financial enterprise departments in Japan have been maintained at a stable level for many years.In the 1990s the bursting of the Japanese asset bubbles had the greatest impact on the business enterprise sector,and after that the enterprise sector started a debt reduction process that lasted over a decade,and the debt level continued to drop.

After 2005,the percentage of debt of non-financial enterprises in Japan in the country's GDP was basically stabilized at about 150%.From the perspective of leverage ratio,the enterprise department has,starting from around 2000,been deleveraging,and the leverage ratio,which assesses enterprises on the ratio between the corporate net debt and the owners'equity,has in the past three years been stabilized at the bottom of about 0.6.

Although Japan has completed its de-leveraging process several years ago,the Japanese economy has been gloomy in these few years.There are several reasons.One is the cyclical factor,including the impact of the global financial crisis(drop in external demands and the Japanese yen drastically appreciating).Meanwhile,the negative impact of structural issues such as population aging is starting to surface.Deflation that has sustained for many years has resulted in sluggish consumption and investment.Overall speaking,although the debts of the Japanese Government remain high,yet the likelihood of the crisis erupting in the short run is low.Back in 2010,the debt-to-GDP ratio of the Japanese Government exceeded 200%,and in 2013 it reached 230%.This is because population aging has resulted in massive spending on subsidies for the aged and medical security.

However,there are two factors that have made the Japanese Government's debts less worrying in the short term.First,although the total debt to GDP ratio exceeded 230%,yet the Japanese Government also holds a large amount of assets(such as equity in public enterprises and bonds).If we take away the total assets,the Japanese Government's net debt to GDP ratio is only about 140%.Second,a lot of debts were held by domestic residents and enterprises.Only about 5%of the debt of the Japanese Government is held by overseas investors.This provided a certain degree of stability in the Japanese national debt market,without the fear of national debt being dumped in large quantities.The completion of the de-leveraging process of Japan's non-financial enterprise department provided a very good foundation for its investment expansion.Although the impact of the upward adjustment of the consumption tax is still to be seen,yet with the support of the super expansionary monetary polices,the Japanese economy can still hope to grow steadily.In light of this,some institutions are predicting that in 2014 Japan's actual GDP will grow by 1.8%.

The series of stringent financial control measures launched by the Eurozone in recent years have,to a certain extent,contained the rising trend of the financial deficits.The fiscal deficit to GDP ratio has been falling year by year,and in 2013 the major policy interest rate(re-financing rate)has been lowered twice,each by 25 basis points(BP),to reach 0.25%in the first quarter of 2014.

This broke the spreading path of“sovereignty debt crisis-banking industry crisis".However,compared with the US and Japan,the form of debt in Europe is not as optimistic.To a very large extent the European debt crisis originated from some member governments allowing their debt level to rise too fast.Although in 2011 the Eurozone already started to implement its financial tightening plans,yet according to the EU Committee,the Eurozone will still maintain its fiscal deficit in 2015,suggesting that in the coming few years the debt of Eurozone governments will continue to increase.Statistics shows that in 2013 the Eurozone governments'debt to GDP ratio was 92.6%,a record high.At the same time,although the public financial status of core countries like Germany is relatively stable,yet peripheral countries such as Spain and Portugal have just managed to suppress the trend of deterioration of their public financial situation.Hence overall recovery will be a long-term process.Although the debt ratio of some member governments is still high,the fiscal tightening pressure in the Eurozone will continue.Coupled with the fact that the problems in the financial system have not been entirely solved,the Eurozone economy is still in the slow beginning of the recovery phase.

Among the three developed economies the Eurozone's growth prospects are the gloomiest.An institution has predicted that in 2014 the Eurozone's GDP growth rate would be around 1.2%,bouncing up from the bottom of negative growth in 2013.From the medium to long term,the unified currency policy of the Eurozone is still a challenge to the debt-ridden countries.Compared with the US,Japan and most other countries,the Eurozone governments lack the capacity of independent banknote printing.This increased the constraints on their ability to shoulder debt.Today it is still difficult to say that the European debt crisis has completely ended. L3VEP0BhYhjAsnOigwEtcUM4UVJ5k9iZQ1y6045Me6blLO6/jCe8EuPuLt4wzzRW