Thursday, 30 December 2010

Deleveraging ? What Deleveraging ?

Now that 2010 is about to leave the building maybe we can talk about one of its most popular themes: deleveraging.

It is true that the current crisis has evolved into a balance sheet crisis, where households’ balance sheets are too battered to support the old spending habits of American people and certainly cannot support taking on more debt.

But not all sectors are deleveraging. That’s why I don’t like sweeping generalizations, they almost never tell the whole truth and in most cases are just plain misleading.

source: St. Louis Fed

The sector of the US economy that is leading the leverage dance, and is still levering up with alarming rates (notice that the curve keeps getting steeper) is the Federal Government. On the other hand, the financial sector as a whole is deleveraging but that is not true for all parts of the industry. Finance companies and brokers/dealers appear to be deleveraging while commercial banks seem to be levering up their balance sheets.

Notice that at the peak of the credit cycle just before the crisis broke out, total debt for the financial sector was more than three times the debt of the federal government. The US certainly have a pretty large financial sector...

source: St. Louis Fed

One sector that is deleveraging is households. A good question is whether this deleveraging is taking place through massive defaults or through the paying off of debts. A look at NPLs (non-performing loans) maybe can give someone a hint.

source: St. Louis Fed

The US corporate sector as a whole is definitely levering up. In a way this is logical if one takes into account the historically low interest rates but maybe, just maybe, we shouldn't forget the tremendous downside risks that not only the US but the world economy is facing. This past year (yes 2010 is now almost over) we saw lots of share buyback programs, a sign, in my humble opinion, that companies are altering their capital structure towards more debt and less equity capital (and also that they cannot come up with more profitable ways to deploy their capital).

Maybe this stat is a bit biased since mostly larger companies have access to the capital markets, while SMEs (Small and Medium Enterprises) don’t. From what I am reading elsewhere on the net, SMEs appear neither to have easy access to bank funding nor to display great willingness to take on more debt. Of course that’s indicative of their view of the prospects of the US economy which for most of them is their sole market.

I want to thank those of you that bothered to read this at this time of the year (probably inappropriate for blogging) and of course those of you that didn't and to wish all of you a happy new year...