The World’s Worst Debtors

(This is a guest article by Alban Guillemot.)

A favorite point of contention with voters the world over is to chastise their governments for their spending and inevitable budget deficits. However, before we start throwing stones at government spending, it is worth taking a look at the glass houses many nations have built around themselves with personal, household debts.

Some nations have always been leaders in personal debt thanks to a consumerist society while others have powered ahead in recent years, having been lulled into larger mortgages by lower interest rates and by forgetting to control their credit cards as well. Of particular note are the nations whose household debts exceed GDP, as nations who as a whole spend more than they earn are on track for internal financial crises, just as the effects of the global crisis subside. To this end, some of the world’s worst debts include Britain, Australia and Switzerland, countries which touted their survival of the GFC, exemplify their low government debts and yet can’t stick to a budget of their own.

The United Kingdom

The picture of household debt in Britain has not been looking good for some time. In 2007, Britons had already accumulated so much debt that it exceeded the value of the country’s economy. With gross domestic product only reaching £1.33 trillion and £1.35 trillion outstanding on mortgages, credit cards and personal loans, this was the first time the citizens of the UK owed more to their banks and creditors, than the value of everything produced by the country. Consumer debt accounted for £1.131 trillion and personal loan and credit card debt was £214 billion.

In 2007, this meant that each individual owed £1,344,721,000,000, however the independent financial analyst Datamonitor has predicted that the total number of Britons who are blacklisted will jump by 20% by 2011 to 8.6 million people.

In 2008, families in the UK owed 173% of their incomes in debts which put the UK debt to income ratio higher than any other country in the Group of Seven leading industrialized economies. Five years earlier Britons had owed just 129% of their incomes.

These figures were the precursor to show an economic slowdown for the UK as a debt burden of 173% of household income even exceeded Japan’s figures at the 1990 peak, which was before what has now been a decade of deflation. The outlook for GDP in 2009 expected it to slow to just 0.5% increasing the chances of a technical recession.

In June 2010, Britain was just one of two countries whose household debt exceeds its GDP, coming in second place behind Switzerland.

household-debt-GDP

Australia

The Australian Government did not have to bail out any of its banks, and there are fewer job losses and foreclosures in Australia after the Global Financial Crisis, leading its leaders to constantly remind the world how they avoided the brunt of the GFC and now have a healthy and growing economy.

However, Australians have the highest personal debt levels in relation to their disposable income, compared to anywhere in the world. In January 2010, each Australian adult was in debt to the value of approximately USD $56,000, where American adults had just USD $44,000 of personal debts each. Mortgage, credit card, and personal loan debts in Australia totals more than AU $1.2 trillion, which is a 71% increase from the previous five years.

This is also the first time for Australians that personal debt has exceeded GDP where debt has risen to 100.04% of the annual gross domestic product. Australians enjoyed emergency level interest rates for some time, and at the same time were encouraged by government stimulus packages to get into the property market, and keep spending – which they did, meaning many families are now heavily indebted and are going to struggle to make it out as their repayments and interest rates rise. Unfortunately, they have a poor example set by the government whose stimulus packages were some of the biggest in relation to the population at AU $42 billion, but have left the government with a large deficit.

Australia-household-debt While 2008 may have begun to show debt levels and disposable income levels coming closer, the ratio of debt to income is around 156% in Australia today, mainly due to the mortgage and housing boom encouraged by significant first home owner grants. In April 2010 the Reserve Bank of Australia revealed that the total outstanding mortgage debt in Australia was $1.1 trillion and personal debt was around $141 billion.

However, the levels of personal debt in Australia will not go unnoticed and could not only lead to a personal credit crisis for many families but a national one as well. Almost 30% of the funding for Australian banks comes from the global markets. Therefore, if investors become overly concerned about the debt levels, Australians could see credit tighten as funds are harder to come by.

Switzerland

Switzerland are in the unique and somewhat hypocritical position of having the highest level of personal debt in relation to GDP, but one of the lowest government debts. As a member of the European Union, Switzerland is part of the EU’s Stability and Growth Pact, which is designed to enforce fiscal discipline by setting deficit ceilings for members, where Brussels has the right to warn and sanction countries who violate these limits.

For the past decade the Pact has been able to strengthen the financial markets of the euro area, and as a result convinced markets that the bloc could manage fiscal and economic differences amongst its members. However, the GFC shook up this stability and single currency members such as Greece, Portugal and Spain are now under pressure due to increased deficits, leading economists to look for new ways to strengthen or replace the pact.

The Swiss President, Doris Leuthard, has been able to keep her country’s economy in line with the bloc’s Maastricht Treaty which requires countries to keep total debt under 60% of GDP and the public deficit below 3% and even though Switzerland is not a part of the European Union, Leuthard wants the bloc to succeed by taking a lesson from her figures.

Switzerland has a debt level of 39% of GDP and is doing its part to foster an economically credible Europe. However, 24 of the 27 EU member states are under the European Commission’s excessive deficit procedure, after exceeding budget limits under the Stability and Growth Pact. As a result, the value of the euro has been shaken, and for the EU to bail out Greece, a 750 billion euro safety net has been set up with the IMF to help any other member state who needs it.

At the same time, the Swiss have the greatest percentage of household debt to GDP across Europe, Asia and the Americas at almost 120%, as illustrated by the first chart in this article.

If there was ever a time for a reality check on debt levels, it is now, as families and individuals are still picking up the pieces of their lives and their finances after realizing they can’t live week to week, paycheck to paycheck, because that does not account for emergencies like job loss or foreclosure. Therefore, every nation and every individual needs to look at their debt levels in relation to their income and find ways to be financially independent and live within their means.

About the author: Alban is a personal finance writer at Home Loan Finder, which helps people find a mortgage broker.

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  • PT

    Alban wrote that “As a member of the European Union, Switzerland is part of the EU’s Stability and Growth Pact”.

    This is not true. Switzerland is not a member of the EU. It is also not a member of the Eurozone, ie, those countries who are members of EMU and whose currency is the Euro. Therefore it is not part of the Stability and Growth Pact. Only Eurozone countries are members of the EU’s Stability and Growth Pact. EU members who are not in the Eurozone, eg, UK, Denmark, are not members of the Stability and Growth Pact.