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Update on deleveraging in US and Europe
Are the seven lean years over?
Teunis Brosens
Amsterdam +31 20 563 6167
teunis.brosens@ing.nl
The cycle of seven years of plenty followed by seven years of hardship can be found in
the economy as well. We are now in the seventh year following the financial crisis.
Indeed, the economy seems to be recovering in the US, the UK and Europe. But do we
also see an end to hardship in the financing of the real economy?
This report focuses on macro lending data. It turns out that only the Eurozone periphery
is actually reducing debt. The US, UK and Eurozone core are deleveraging by growing
income. The US, UK and Eurozone core compare favourably with Japan in the 1990s,
but deleveraging may have further to go in the Eurozone periphery.
ING Global Economics, June 2014
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10 June 2014 1
Are the seven lean years over?
Main findings
Deleveraging in the US, UK and Eurozone core has
mostly taken place not through debt reduction, but
through income growth.
The Eurozone periphery is the exception: there, debt
is declining while income is stagnating.
Comparisons with Japan show that, especially in the
Eurozone periphery, deleveraging may not be over.
Banks account for over half to two-thirds of credit
outstanding in Europe. This figure is less than one-
third in the US.
Deleveraging does not preclude growth. This is
important for the Eurozone periphery.
Table of contents Slide no.
Overview of household deleveraging 2
Overview of business deleveraging 6
Deleveraging and growth 11
Who is lending? 12
Credit outstanding by lender 16
Conclusions 18
Update on deleveraging in the US and Europe
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10 June 2014 2
Household debt ratio improves in US, UK
Core = GE, FR, NL, BE, AT, FI.
Periphery = ES, IT, PT, EL.
Source: ECB, BEA, Federal Reserve, BIS, Ecowin, ING
but these countries started with higher debt too
0%
20%
40%
60%
80%
100%
120%
140%
160%
180%
'90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14
Deleveraging = Reduction of the debt-
to-income ratio
Since 2008, households in the US and
UK have been deleveraging.
There has been less deleveraging in the
Eurozone periphery and little in the
Eurozone core.
Despite deleveraging, the household debt
ratio is still higher in the US and UK than
in the Eurozone.
Is Eurozone household deleveraging
really necessary?
Household debt ratio
% of disposable income
Core Periphery US UK
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10 June 2014 3
-30%
-25%
-20%
-15%
-10%
-5%
0%
5%
10%
Ratio, because
of Debt DPI
Except in Eurozone periphery
Income growth drives deleveraging
Core Periphery US UK
Core = GE, FR, NL, BE, AT, FI.
Periphery = ES, IT, PT, EL.
Source: ECB, BEA, Federal Reserve, BIS, Ecowin, ING
What drives household deleveraging?
Contrary to common wisdom, debt
reduction is not the main driver of
deleveraging. Income growth is more
important in the US, UK and Eurozone
core.
In the UK and Eurozone core, debt has
actually increased since 2008. The debt-
to-income ratio is still down due to
income growth.
The Eurozone periphery stands out with
reduction in debt. Reduction in
disposable income is slowing down
deleveraging there.
Household debt ratio
% of disposable income
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10 June 2014 4
Core
Periphery
US
UK
-$500bn
$0bn
$500bn
$1000bn
$1500bn
0bn
50bn
100bn
150bn
0bn
50bn
100bn
150bn
200bn
-100bn
0bn
100bn
200bn
300bn
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Net lending to households
Flows, 12month moving sum
it never really started in UK and Eurozone core
Household deleveraging may be over in US
In the US, household debt has been
slowly increasing since last year. In the
absence of major shocks, debt reduction
seems unlikely. Further deleveraging is
likely through GDP and income growth.
In the UK and most Eurozone core
countries (with the exception of NL),
household debt has shown little to no
sign of decreasing.
In the peripheral countries, household
debt growth entered negative territory in
2012 and is still to recover.
Core = GE, FR, NL, BE, AT, FI.
Periphery = ES, IT, PT, EL.
Source: ECB, BEA, Federal Reserve, BIS, Ecowin, ING
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10 June 2014 5
'80 '83 '86 '89 '92 '95 '98 '01 '04 '07 '10 '13
0%
20%
40%
60%
80%
100%
120%
140%
160%
180%
'97 '00 '03 '06 '09 '12 '15 '18 '21 '24 '27 '30
Household debt ratio
% of disposable income
Core
Periphery
US
UK
Japan
'80 '83 '86 '89 '92 '95 '98 '01 '04 '07 '10 '13
-10%
-5%
0%
5%
10%
15%
20%
25%
'97 '00 '03 '06 '09 '12 '15 '18 '21 '24 '27 '30
Net lending to households
Credit growth in % on year earlier
Stagnation, rather than deleveraging, in JP
Household deleveraging in Japan never really took hold. Net lending to households has been hovering around zero since 1992.
Japan shows that further household deleveraging is not necessary, but neither is a pick-up in household borrowing. On the
positive side, household debt ratios in the US, UK and EZ are already lower now than in Japan.
Japan on upper horizontal axis, other countries on lower axis.
Core = GE, FR, NL, BE, AT, FI.
Periphery = ES, IT, PT, EL.
Source: ECB, BEA, Federal Reserve, BIS, Bank of Japan, Ecowin, ING
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10 June 2014 6
Debt-to-equity ratio
Non-financial business sector
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
'90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14
Eurozone periphery stands out with high leverage
Business sector gradually deleveraging (1/2)
One way to measure leverage in the
(non-financial) business sector is debt
to equity.
Fluctuations in this ratio are caused by
changes in debt and equity. As some
companies are listed, stock market
fluctuations tend to show up in this ratio.
Leverage in the US, UK and Eurozone
core is not all that different in the
aggregate. Leverage has been reduced
very gradually since 2008 in these
countries. The periphery stands out with
higher leverage, especially since 2008.
Core = GE, FR, NL, BE, AT, FI.
Periphery = ES, IT, PT, EL.
Source: ECB, BEA, Federal Reserve, BIS, Ecowin, ING
Core Periphery US UK
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10 June 2014 7
Debt-to-GVA ratio
Non-financial business sector
0%
50%
100%
150%
200%
250%
'90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14
Eurozone periphery stands out with high leverage
Business sector gradually deleveraging (2/2)
An alternative measure of leverage in
the (non-financial) business sector is
the debt-to-gross-value-added (GVA)
ratio. This ratio better reflects
businesses debt servicing capacity.
This ratio shows that, as an aggregate,
business is slowly deleveraging.
Again, the periphery stands out with
higher leverage, especially since 2008.
Core = GE, FR, NL, BE, AT, FI.
Periphery = ES, IT, PT, EL.
Source: ECB, BEA, Federal Reserve, BIS, Ecowin, ING
Core Periphery US UK
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Reduction in business debt-to-GVA ratio
% since peak
-50%
-40%
-30%
-20%
-10%
0%
10%
20%
30%
40%
Ratio, because
of Debt GVA
Except for Eurozone periphery
Income growth drives business deleveraging
What drives non-financial business
deleveraging?
In the US, the UK and, to a lesser extent,
the Eurozone core, deleveraging was
driven by an increase in gross value
added. Debt outstanding actually
increased in all three regions, especially
the US.
Again, the Eurozone periphery stands
out. Gross value added has hardly
increased since 2009, and deleveraging
is almost fully driven by an actual
reduction in debt outstanding.
Core = GE, FR, NL, BE, AT, FI.
Periphery = ES, IT, PT, EL.
Source: ECB, BEA, Federal Reserve, BIS, Ecowin, ING
Core Periphery US UK
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10 June 2014 9
Except for US, deleveraging may not be over
Net lending to non-financial business
Flows, 12month moving sum
-$500bn
$0bn
$500bn
$1000bn
$1500bn
-100bn
0bn
100bn
200bn
-200bn
0bn
200bn
400bn
-200bn
0bn
200bn
400bn
'92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14
US net lending to non-financial business
only briefly turned negative in 2010 and
has been recovering since then.
UK net lending has stagnated;
deleveraging may not be over.
In the Eurozone core, the 2011 revival of
net lending is wearing off.
Eurozone periphery debt growth turned
negative in 2012 and is yet to recover.
Given the still high debt-to-GVA and debt-
to-equity ratios in the periphery, further
deleveraging seems likely.
Core
Periphery
US
UK
Core = GE, FR, NL, BE, AT, FI.
Periphery = ES, IT, PT, EL.
Source: ECB, BEA, Federal Reserve, BIS, Ecowin, ING
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10 June 2014 10
'80 '83 '86 '89 '92 '95 '98 '01 '04 '07 '10 '13
-10%
-5%
0%
5%
10%
15%
20%
25%
'97 '00 '03 '06 '09 '12 '15 '18 '21 '24 '27 '30
'80 '83 '86 '89 '92 '95 '98 '01 '04 '07 '10 '13
0%
50%
100%
150%
200%
250%
'97 '00 '03 '06 '09 '12 '15 '18 '21 '24 '27 '30
Debt-to-GVA ratio
Non-financial business sector
Core
Periphery
US
UK
Japan
Net lending to non-financial business
Credit growth in % on year earlier
Deleveraging took 10 years in JP
Business deleveraging in Japan really started only in 1998. It then saw 10 years of zero or negative net lending.
The Japanese experience confirms that deleveraging may not be over, especially in the EZ periphery. In the US, UK and
Eurozone core, however, debt ratios are already at levels reached by Japan after deleveraging.
Japan on upper horizontal axis, other countries on lower axis.
Core = GE, FR, NL, BE, AT, FI.
Periphery = ES, IT, PT, EL.
Source: ECB, BEA, Federal Reserve, BIS, Bank of Japan, Ecowin, ING
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-2%
-1%
0%
1%
-6%
-4%
-2%
0%
2%
4%
6%
'92 '96 '00 '04 '08 '12
GDP growth and household credit impulse
Eurozone periphery, %YoY
Deleveraging does not preclude growth
Credit impulse = Change in net-
lending-to-GDP ratio compared with a
year ago.
Household credit impulse is an
(concurrent or leading) indicator of GDP
growth: it often signals turning points in
the cycle.
Credit impulse shows that negative net
lending does not need to preclude
growth. This is especially important for
the Eurozone periphery, where net
household lending is still negative.
Source: ECB, BEA, Federal Reserve, BIS, Ecowin, ING
GDP growth Household credit impulse
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10 June 2014 12
Lending to non-financial private sector
Flows, 12month moving sum
-$1000bn
-$500bn
$0bn
$500bn
$1000bn
$1500bn
$2000bn
$2500bn
'92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14
US: Securitisation on hold, bond issuance up
In the 1990s, net lending to US
households and non-financial businesses
was mostly driven by banks and
securitisation.
The securitisation engine shifted up a
gear in the 2000s.
After 2008, securitisation contributed
negatively to net lending but recently
turned positive again.
Bond issuance by non-financial
businesses has steadily increased since
2008.
Source: ECB, BEA, Federal Reserve, BIS, AFME, Sifma, Ecowin, ING
Banks Other Bonds Securitised
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Lending to non-financial private sector
Flows, 12month moving sum
-200bn
-150bn
-100bn
-50bn
0bn
50bn
100bn
150bn
200bn
250bn
300bn
'92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14
UK: Bond issuance has held up well
Net lending to UK households and non-
financial businesses accelerated in the
late 1990s.
This acceleration was first driven by
banks and later also by securitisation.
After 2008, net lending turned negative.
Banks took securitised loans back on
their balance sheets.
Net lending turned positive again in mid-
2011.
The corporate bond market was a
relatively constant lending channel in the
post-crisis years.
Source: ECB, BEA, Federal Reserve, BIS, AFME, Sifma, Ecowin, ING
Banks Other Bonds Securitised
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Lending to non-financial private sector
Flows, 12month moving sum
-200bn
-100bn
0bn
100bn
200bn
300bn
400bn
500bn
600bn
'92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14
EZ core: Banks still lending, bond issuance up
Net lending to Eurozone core households
and non-financial businesses is mostly
driven by banks.
The corporate bond market peaked in the
early 2000s, and has provided an
alternative source of credit since 2008.
Securitisation became increasingly
important in the 2000s. 2012 also saw a
peak in securitisation activity (this was
presumably mostly internal securitisation
by banks).
Source: ECB, BEA, Federal Reserve, BIS, AFME, Sifma, Ecowin, ING
Banks Other Bonds Securitised
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Lending to non-financial private sector
Flows, 12month moving sum
-300bn
-200bn
-100bn
0bn
100bn
200bn
300bn
400bn
500bn
600bn
700bn
'92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14
EZ periphery: Banks retreating, few alternatives
EZ periphery lending to households and
non-financial businesses is almost
exclusively driven by banks.
Securitisation played a role from the late
1990s to 2008, and the market revived in
2013.
The corporate bond market hardly plays
a role in periphery financing, although
activity picked up slightly in 2013.
Source: ECB, BEA, Federal Reserve, BIS, AFME, Sifma, Ecowin, ING
Banks Other Bonds Securitised
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0%
20%
40%
60%
80%
100%
'91 '93 '95 '97 '99 '01 '03 '05 '07 '09 '11 '13
0%
20%
40%
60%
80%
100%
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Banks: 31%
Other: 0%
Bonds: 24%
Securitised 45%
Share in non-financial private debt outstanding
US
UK
Banks: 58%
Other: 15%
Bonds: 15%
Securitised 13%
Market finance gaining ground in US, UK
Securitisation was, and continues to be,
a major source of financing in the US.
Banks share is on a slowly declining
trend.
The corporate bond market has been
gaining importance since 2008.

Note: In the UK and Eurozone, the other
category includes intercompany loans
and loans from corporate financing
daughters to their parents.
Source: ECB, BEA, Federal Reserve, BIS, AFME, Sifma, Ecowin, ING
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Share in non-financial private debt outstanding
0%
20%
40%
60%
80%
100%
'91 '93 '95 '97 '99 '01 '03 '05 '07 '09 '11 '13
0%
20%
40%
60%
80%
100%
'91 '93 '95 '97 '99 '01 '03 '05 '07 '09 '11 '13
Core
Periphery
Banks: 63%
Other: 23%
Bonds: 9%
Securitised 5%
Banks: 73%
Other: 13%
Bonds: 4%
Securitised 9%
Banks remain main lender in Eurozone
Banks remain the main lenders in
Europe.
Securitisation is of limited importance in
the Eurozone core, and is slightly more
important in the periphery.
The corporate bond market is only slowly
gaining ground.

Note: In the UK and the Eurozone, the other
category includes intercompany loans and
loans from corporate financing daughters to
their parents.
Source: ECB, BEA, Federal Reserve, BIS, AFME, Sifma, Ecowin, ING
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10 June 2014 18
The lean years last longer for some
Main conclusions
In both the household and non-financial business sectors, only the Eurozone periphery is actually reducing debt. The US,
UK and Eurozone core are deleveraging by growing income.
The US, UK and Eurozone core compare favourably with Japan in the 1990s, where household debt ratios stagnated and
business deleveraging was slow.
Debt ratios are higher in the Eurozone periphery, and the Japanese experience suggests that deleveraging has further to
go there. That said, deleveraging does not preclude growth.
Corporate debt issuance has partly compensated for the slowdown in bank lending and stagnation of securitisation in
most countries. But banks still have over half of all loans to the non-financial sector on their books in the UK and the
Eurozone. In the US, the banks share is down to 30%.
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10 June 2014 19
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