Developing countries have continued to raise their levels of private sector debt in the wake of the global financial crisis, while developed ones have generally lowered them, says Moody's Investors Service in the report "Private leverage trends in developed and developing economies."
While leverage in the developing countries, in terms of debt to GDP, is still only about half that in the developed countries and growth in debt is a normal part of economic development, debt may be reaching levels associated with slower growth for some economies, says Moody's.
"In both developed and developing economies, more leverage is not necessarily associated with more growth, and vice versa," says Lucio Vinhas de Souza, a Moody's Managing Director and Chief Economist for its Sovereign Risk Group. "In Developing Asia, and China in particular, the level of leverage may have reached that associated in some recent studies with slower growth. Given the now increasingly important role that developing economies have for global growth, this is a potential concern for the global economy."
Trends in leverage show significant variation across the developing countries, says Moody's. Developing Asia and Latin America have been largely driving the increasing leveraging trend even during the global crisis. Debt has stabilized in Central and Eastern Europe, and has been falling in the Middle East and North Africa, partly due to political unrest.
In the developed economies overall leverage levels remain very high by historical standards. The high leverage leaves households vulnerable to further negative shocks, such as unexpected increases in interest rates.
Among the developed countries, those deleveraging the most have been the US, the UK and Japan. Meanwhile, adjustments in the euro area have so far been relatively modest, although leverage had been at a lower level there than in the other developed countries before the crisis.