By  Ashley Owen, CFA

In terms of total debt loads, Japan retains the wooden spoon by a big margin. Japan is locked in a death spiral – with ever-increasing welfare bills for its aging population, and declining workforce, tax-payer base, and population.

The seemingly obvious lesson from the GFC was to avoid excessive debt, but nobody was listening! Far from ‘de-leveraging’ after the shock of the GFC, households, companies and governments everywhere loaded up on cheap debt in the post-GFC, ‘QE’ years.

Then, in the 2020-1 covid crisis, debt levels rose rapidly again with the deficit spending sprees, ultra-low interest rates, and cheap lending programs specifically designed to encourage everyone to take on even more debt!

What could possibly go wrong?

Massive debts racked up on temporary, artificial, ultra-low, inflation-inducing, zero-negative interest rates, at the same time as huge, wartime-like, inflation-inducing, debt-funded deficit spending sprees! The inevitable result?

Surprise, surprise: inflation and asset bubbles! The inflation spike ended QE and ultra-low rates, and triggered the start of aggressive rate hikes, debt stress, asset price corrections, and inevitable bankruptcy crises that are now only just starting.

The good news is that every country except Japan and China has managed to reduce their debt loads since the 2020 peak debt levels. This has been mainly via economic growth and inflation, rather than reducing actual debts (governments rarely pay off or even reduce debt – much easier to just inflate it away!).

Some countries have managed to reduce their household debt loads – notably Spain, USA, and UK – but at great cost - in their painful GFC housing corrections that triggered mass bankruptcies, bank collapses, and tax-payer funded bailouts.

Could that happen again?

As a guide to how vulnerable countries may be to another GFC-like bad debt crisis, compare the level of debts in 2007 (pre-GFC) to now. In every case, debt loads are higher now than pre-GFC.

There is more pain ahead for households, as the full impact of recent rate hikes are yet to flow through to mortgage repayments, and there are probably some more rate hikes to come as well. See our story ‘Are we there yet? – on rate hikes’

The big mover in recent years has been China, which has jumped up the table to 4^th highest total debt load, now ahead of UK, Spain, USA, and Italy. Although much of the debt in China is labelled ‘corporate’, in reality most is state-controlled entities, propped up by endless rounds of refinancing into the never-never by state-controlled banks, terrified of the social unrest that may be unleashed if unprofitable ‘zombie’ companies were allowed to collapse.

Australia had virtually no federal government debt going into the GFC but quickly racked up government debt to finance the GFC deficit spending sprees.

Government deficits were reduced back to zero by 2019, but debt levels soared again to fund the Covid deficit spending sprees.

Other countries everywhere also racked up debt in the GFC and Covid, but Australia’s government debt levels are still among the lowest in the world (even if we add another 10% of GDP for state debts), thanks to windfall mining tax revenues in the long post-2001 mining/China boom.

Corporate debt levels in Australia have shrunk as the banks (which are now just bloated building societies) prefer mortgage lending over business lending because it requires half the capital and even less brains.

This is a real policy problem for Australia, as companies are the engine room for employment, productivity, and growth, but the big dinosaur banks have long since lost the skill and will to lend to business.

Australia is the perennial winner of the wooden spoon for the highest level of household debt relative to national income (only Switzerland is higher by a slim margin).

Australia had the highest levels of household debt in the world before the GFC, and has increased its ‘lead’ even further since then.

Our high household debt levels, combined with the fact that the majority is on floating interest rates, plus the ‘mortgage cliff’ of short term fixed-rate loans written at temporarily low rates thanks to the RBA’s ill-advised and misleading announcements on not raising rates for three years, and its ultra-cheap funding programs, makes Australian households more vulnerable than any other country to the negative impacts of interest rate hikes.

Australia should have the most affordable land and housing in the world. We have the sparsest population in the world (or put another way, we have the most land per person: 298,000 square metres, or 74 quarter-acre blocks, per head of population), we have an abundance of cheap building materials, and we have giant, lazy banks that do nothing but lend on housing!

But somehow, we have the most expensive housing in the world, propped up by the highest levels of household debt in the world.

Fortunately for highly indebted borrowers, house prices have been kept relatively high by strong demand (mainly from immigration) and by intractable supply constraints (‘NIMBYs’, local councils, and state governments).

As long as house prices are kept relatively high, and unemployment remains below say 10% (unemployment reached 10.4% in the early 1981-3 recession, 10.9% in the 1990-1 recession, but only 5.8% in the GFC), another widespread housing/ foreclosure/ bankruptcy crisis is unlikely here.

see our story ‘Are we there yet? – on rate hikes’

This article is written by Ashley Owen, CFA and the views expressed are his own.

Ashley is a well known Australias market commentator with over 40 years experience.

Formal qualifications:
• LLB, LLM - University of Sydney
• BA (economic history, international relations) – Deakin University
• Grad Dip, Applied Finance & Investment - Securities Institute of Australia (FINSIA)
• CFA Charter – CFA Institute

Membership & associations:
• CFA charter holder
• Signatory to the UN Principles for Responsible Investment
• Occasional member, Education Advisory Board Working Committee of the CFA Institute (US)