Skip navigation

Monthly Archives: February 2012


 In the delivery of high performance complex financial information and knowledge the delivery platform moves from ‘me’ to ‘we’, namely, it is:

 Collaborative

 Integrative

 Transparant

It is based upon a delivery model which is the antithesis of a top down product driven platform.

Complex ideas are not commodities. Those responsible for their delivery are held to a high performance standard of lifetime preparation, delivery and a commitment to unbiased client centric focus and long term care.

Exponential economic growth of complex knowledge and information based services (Medical,, Legal, Financial) requires open and direct dialogue among each of the professional participants contributing within the delivery platform.

For a better understanding of impartial advice

Check this link:

For a better understanding of Integrative thinking

Check this link:

My pupose on Linkedin is to deliver a greater understanding of what it takes to deliver the above.

Dan Zwicker
Toronto, Canada
02 27 2012

‘Raising The Bar’

An update of our research on the efforts of developed countries to work out from under a massive overhang of debt shows how uneven progress has been. US households have made the greatest gains so far.The deleveraging process that began in 2008 is proving to be long and painful. Historical experience, particularly post–World War II debt reduction episodes, which the McKinsey Global Institute reviewed in a report two years ago, suggested this would be the case.1 And the eurozone’s debt crisis is just the latest demonstration of how toxic the consequences can be when countries have too much debt and too little growth.

We recently took another look forward and back—at the relevant lessons from history about how governments can support economic recovery amid deleveraging and at the signposts business leaders can watch to see where economies are in that process. We reviewed the experience of the United States, the United Kingdom, and Spain in depth, but the signals should be relevant for any country that’s deleveraging.

Deleveraging: Where are we now?

The financial crisis highlighted the danger of too much debt, a message that has only been reinforced by Europe’s recent sovereign-debt challenges. And new McKinsey Global Institute research shows that the unwinding of debt—or deleveraging—has barely begun. Since 2008, debt ratios have grown rapidly in France, Japan, and Spain and have edged downward only in Australia, South Korea, and the United States. Overall, the ratio of debt to GDP has grown in the world’s ten largest economies.Overall, the deleveraging process has only just begun. During the past two and a half years, the ratio of debt to GDP, driven by rising government debt, has actually grown in the aggregate in the world’s ten largest developed economies (for more, see sidebar, “Deleveraging: Where are we now?”). Private-sector debt has fallen, however, which is in line with historical experience: overextended households and corporations typically lead the deleveraging process; governments begin to reduce their debts later, once they have supported the economy into recovery.

Different countries, different paths

In the United States, the United Kingdom, and Spain, all of which experienced significant credit bubbles before the financial crisis of 2008, households have been reducing their debt at different speeds. The most significant reduction occurred among US households. Let’s review each country in turn.

The United States: Light at the end of the tunnel

Household debt outstanding has fallen by $584 billion (4 percent) from the end of 2008 through the second quarter of 2011 in the United States. Defaults account for about 70 and 80 percent of the decrease in mortgage debt and consumer credit, respectively. A majority of the defaults reflect financial distress: overextended homeowners who lost jobs during the recession or faced medical emergencies found that they could not afford to keep up with debt payments. It is estimated that up to 35 percent of the defaults resulted from strategic decisions by households to walk away from their homes, since they owed far more than their properties were worth. This option is more available in the United States than in other countries, because in 11 of the 50 states—including hard-hit Arizona and California—mortgages are nonrecourse loans, so lenders cannot pursue the other assets or income of borrowers who default. Even in recourse states, US banks historically have rarely pursued borrowers.

Historical precedent suggests that US households could be up to halfway through the deleveraging process, with one to two years of further debt reduction ahead. We base this estimate partly on the long-term trend line for the ratio of household debt to disposable income. Americans have constantly increased their debt levels over the past 60 years, reflecting the development of mortgage markets, consumer credit, student loans, and other forms of credit. But after 2000, the ratio of household debt to income soared, exceeding the trend line by about 30 percentage points at the peak  As of the second quarter of 2011, this ratio had fallen by 11 percent from the peak; at the current rate of deleveraging, it would return to trend by mid-2013. Faster growth of disposable income would, of course, speed this process.

We came to a similar conclusion when we compared the experiences of US households with those of households in Sweden and Finland in the 1990s. During that decade, these Nordic countries endured similar banking crises, recessions, and deleveraging. In both, the ratio of household debt to income declined by roughly 30 percent from its peak. As Exhibit 2 indicates, the United States is closely tracking the Swedish experience, and the picture looks even better considering that clearing the backlog of mortgages already in the foreclosure pipeline could reduce US household debt ratios by an additional six percentage points.

As for the debt service ratio of US households, it’s now down to 11.5 percent—well below the peak of 14.0 percent, in the third quarter of 2007, and lower than it was even at the start of the bubble, in 2000. Given current low interest rates, this metric may overstate the sustainability of current US household debt levels, but it provides another indication that they are moving in the right direction.

Nonetheless, after US consumers finish deleveraging, they probably won’t be as powerful an engine of global growth as they were before the crisis. That’s because home equity loans and cash-out refinancing, which from 2003 to 2007 let US consumers extract $2.2 trillion of equity from their homes—an amount more than twice the size of the US fiscal-stimulus package—will not be available. The refinancing era is over: housing prices have declined, the equity in residential real estate has fallen severely, and lending standards are tighter. Excluding the impact of home equity extraction, real consumption growth in the pre-crisis years would have been around 2 percent per annum—similar to the annualized rate in the third quarter of 2011.

The United Kingdom: Debt has only just begun to fall

Three years after the start of the financial crisis, UK households have deleveraged only slightly, with the ratio of debt to disposable income falling from 156 percent in the fourth quarter of 2008 to 146 percent in second quarter of 2011. This ratio remains significantly higher than that of US households at the bubble’s peak. Moreover, the outstanding stock of household debt has fallen by less than 1 percent. Residential mortgages have continued to grow in the United Kingdom, albeit at a much slower pace than they did before 2008, and this has offset some of the £25 billion decline in consumer credit.

Still, many UK residential mortgages may be in trouble. The Bank of England estimates that up to 12 percent of them may be in some kind of forbearance process, and an additional 2 percent are delinquent— similar to the 14 percent of US mortgages that are in arrears, have been restructured, or are now in the foreclosure pipeline (Exhibit 3). This process of quiet forbearance in the United Kingdom, combined with record-low interest rates, may be masking significant dangers ahead. Some 23 percent of UK households report that they are already “somewhat” or “heavily” burdened in paying off unsecured debt.2 Indeed, the debt payments of UK households are one-third higher than those of their US counterparts—and 10 percent higher than they were in 2000, before the bubble. This statistic is particularly problematic because at least two-thirds of UK mortgages have variable interest rates, which expose borrowers to the potential for soaring debt payments should interest rates rise.

Given the minimal amount of deleveraging among UK households, they do not appear to be following Sweden or Finland on the path of significant, rapid deleveraging. Extrapolating the recent pace of UK household deleveraging, we find that the ratio of household debt to disposable income would not return to its long-term trend until 2020. Alternatively, it’s possible that developments in UK home prices, interest rates, and GDP growth will cause households to reduce debt slowly over the next several years, to levels that are more sustainable but still higher than historic trends. Overall, the United Kingdom needs to steer a difficult course that reduces household debt steadily, but at a pace that doesn’t stifle growth in consumption, which remains the critical driver of UK GDP

Spain: The long unwinding road

Since the credit crisis first broke, Spain’s ratio of household debt to disposable income has fallen by 4 percent and the outstanding stock of household debt by just 1 percent. As in the United Kingdom, home mortgages and other forms of credit have continued to grow while consumer credit has fallen sharply.

Spain’s mortgage default rate climbed following the crisis but remains relatively low, at approximately 2.5 percent, thanks to low interest rates. The number of mortgages in forbearance has also risen since the crisis broke, however. And more trouble may lie ahead. Almost half of the households in the lowest-income quintile face debt payments representing more than 40 percent of their income, compared with slightly less than 20 percent for low-income US households. Meanwhile, the unemployment rate in Spain is now 21.5 percent, up from 9 percent in 2006. For now, households continue to make payments to avoid the country’s conservative recourse laws, which allow lenders to go after borrowers’ assets and income for a long period.

In Spain, unlike most other developed economies, the corporate sector’s debt levels have risen sharply over the past decade. A significant drop in interest rates after the country joined the eurozone, in 1999, unleashed a run-up in real-estate spending and an enormous expansion in corporate debt. Today, Spanish corporations hold twice as much debt relative to national output as do US companies, and six times as much as German companies. Debt reduction in the corporate sector may weigh on growth in the years to come

Signposts for recovery

Paring debt and laying a foundation for sustainable long-term growth should take place simultaneously, difficult as that may seem. For economies facing this dual challenge today, a review of history offers key lessons. Three historical episodes of deleveraging are particularly relevant: those of Finland and Sweden in the 1990s and of South Korea after the 1997 financial crisis. All these countries followed a similar path: bank deregulation (or lax regulation) led to a credit boom, which in turn fueled real-estate and other asset bubbles. When they collapsed, these economies fell into deep recession, and debt levels fell.

In all three countries, growth was essential for completing a five- to seven-year-long deleveraging process. Although the private sector may start to reduce debt even as GDP contracts, significant public-sector deleveraging, absent a sovereign default, typically occurs only when GDP growth rebounds, in the later years of deleveraging (Exhibit 4). That’s true because the primary factor causing public deficits to rise after a banking crisis is declining tax revenue, followed by an increase in automatic stabilizer payments, such as unemployment benefits.3 A rebound of economic growth in most deleveraging episodes allows countries to grow out of their debts, as the rate of GDP growth exceeds the rate of credit growth.

No two deleveraging economies are the same, of course. As relatively small economies deleveraging in times of strong global economic expansion, Finland, South Korea, and Sweden could rely on exports to make a substantial contribution to growth. Today’s deleveraging economies are larger and face more difficult circumstances.

Still, historical experience suggests five questions that business and government leaders should consider as they evaluate where today’s deleveraging economies are heading and what policy priorities to emphasize

1. Is the banking system stable?

In Finland and Sweden, banks were recapitalized and some were nationalized. In South Korea, some banks were merged and some were shuttered, and foreign investors for the first time got the right to become majority investors in financial institutions. The decisive resolution of bad loans was critical to kick-start lending in the economic- rebound phase of deleveraging.

The financial sectors in today’s deleveraging economies began to deleverage significantly in 2009, and US banks have accomplished the most in that effort. Even so, banks will generally need to raise significant amounts of additional capital in the years ahead to comply with Basel III and national regulations. In most European countries, business demand for credit has fallen amid slow growth. The supply of credit, to date, has not been severely constrained. A continuation of the eurozone crisis, however, poses a risk of a significant credit contraction in 2012 if banks are forced to reduce lending in the face of funding constraints. Such a forced deleveraging would significantly damage the region’s ability to escape recession.

2. Are structural reforms in place?

In the 1990s, each of the crisis countries embarked on a program of structural reform. For Finland and Sweden, accession to the European Union led to greater economies of scale and higher direct investment. Deregulation in specific industry sectors—for example, retailing—also played an important role.4 South Korea followed a remarkably similar course as it restructured its large corporate conglomerates, or chaebol, and opened its economy wider to foreign investment. These reforms unleashed growth by increasing competition within the economy and pushing companies to raise their productivity.

Today’s troubled economies need reforms tailored to the circumstances of each country. The United States, for instance, ought to streamline and accelerate regulatory approvals for business investment, particularly by foreign companies. The United Kingdom should revise its planning and zoning rules to enable the expansion of successful high-growth cities and to accelerate home building. Spain should drastically simplify business regulations to ease the formation of new companies, help improve productivity by promoting the creation of larger ones, and reform labor laws.5 Such structural changes are particularly important for Spain because the fiscal constraints now buffeting the European Union mean that the country cannot continue to boost its public debt to stimulate the economy. Moreover, as part of the eurozone, Spain does not have the option of currency depreciation to stimulate export growth.

3. Have exports surged?

In Sweden and Finland, exports grew by 10 and 9.4 percent a year, respectively, between 1994 and 1998, when growth rebounded in the later years of deleveraging. This boom was aided by strong export-oriented companies and the significant currency devaluations that occurred during the crisis (34 percent in Sweden from 1991 to 1993). South Korea’s 50 percent devaluation of the won, in 1997, helped the nation boost its share of exports in electronics and automobiles.

Even if exports alone cannot spur a broad recovery, they will be important contributors to economic growth in today’s deleveraging economies. In this fragile environment, policy makers must resist protectionism. Bilateral trade agreements, such as those recently passed by the United States, can help. Salvaging what we can from the Doha round of trade talks will be important. Service exports, including the “hidden” ones that foreign students and tourists generate, can be a key component of export growth in the United Kingdom and the United States.

4. Is private investment rising?

Another important factor that boosted growth in Finland, South Korea, and Sweden was the rapid expansion of investment. In Sweden, it rose by 9.7 percent annually during the economic rebound that began in 1994. Accession to the European Union was part of the impetus. Something similar happened in South Korea after 1998 as barriers to foreign direct investment fell. These soaring inflows helped offset slower private-consumption growth as households deleveraged.

Given the current very low interest rates in the United Kingdom and the United States, there is no better time to embark upon investments. Those for infrastructure represent an important enabler, and today there are ample opportunities to renew the aging energy and transportation networks in those countries. With public funding limited, the private sector can play an important role in providing equity capital, if pricing and regulatory structures enable companies to earn a fair return.

5. Has the housing market stabilized?

During the three historical episodes discussed here, the housing market stabilized and began to expand again as the economy rebounded. In the Nordic countries, equity markets also rebounded strongly at the start of the recovery. This development provided additional support for a sustainable rate of consumption growth by further increasing the “wealth effect” on household balance sheets.

In the United States, new housing starts remain at roughly one-third of their long-term average levels, and home prices have continued to decline in many parts of the country through 2011. Without price stabilization and an uptick in housing starts, a stronger recovery of GDP will be difficult,6 since residential real-estate construction alone contributed 4 to 5 percent of GDP in the United States before the housing bubble. Housing also spurs consumer demand for durable goods such as appliances and furnishings and therefore boosts the sale and manufacture of these products.

At a time when the economic recovery is sputtering, the eurozone crisis threatens to accelerate, and trust in business and the financial sector is at a low point, it may be tempting for senior executives to hunker down and wait out macroeconomic conditions that seem beyond anyone’s control. That approach would be a mistake. Business leaders who understand the signposts, and support government leaders trying to establish the preconditions for growth, can make a difference to their own and the global economy.

JANUARY 2012 •
Karen Croxson, Susan Lund, and Charles Roxburgh
Source: McKinsey Global Institute

The authors wish to thank Toos Daruvala and James Manyika for their thoughtful input, as well as Albert Bollard and Dennis Bron for their contributions to the research supporting this article.

About the Authors

Karen Croxson, a fellow of the McKinsey Global Institute (MGI), is based in McKinsey’s London office; Susan Lund is director of research at MGI and a principal in the Washington, DC, office; Charles Roxburgh is a director of MGI and a director in the London office.



Here’s a bit of advice if haven’t saved a dime for your retirement: Try it out first.

“I think if you want to have a sense of what that lifestyle is going to be like you should practise living on it now,” says author Gail Vaz-Oxlade, a strong proponent of living debt-free and saving.

 “Forget about whether you can enjoy it, see what you’ll have to do to make it work:’

The reality is if you want to stop working completely at 65 and retire, you are going to have to make some tough lifestyle choices if you are just surviving on government money.

Consider the maximum you can get from Canada Pension Plan is $986.67 a month per person. Add in $540.12 for Old Age Security. You could qualify for the Guaranteed Income Supplement but once you start coupling up, it gets clawed back. 

Sure there’s not much tax, if any, in most provinces on the money, but try living on it. Median household expenditure in Canada is about $58,000, according to Statistics Canada. For couples over 65, the median drops to $39,000. And let’s not forget that $986.67 is the maximum amount the average Canadian receives only $512.64 monthly from CPP.

You really need to see what it’s going to be like when you are old and poor

“If you try living on that much money right now and find it’s impossible, maybe it’s enough motivation for you to split the difference and put some of that money back in your savings and not spend all of it on crap now:’ Ms. Vaz-Oxlade says.

She says people need a reality check to understand that if they are spending money on “37 versions of cellphone plans you have between now and when you retire;’ that will come with a price.

“It’s not going to mean much when you open up your fridge and all you are looking at is a bag of milk and some yogurt and that’s all you have until the end of the week,” she says. “You really need to see what it’s going to be like when you are old and poor:’

How will it play out? Thke a look at the cellphone. While the average Canadian household spends about $619 a year on the devices, for a couple over 65 it drops to $246 a year. Food drops to $6,853 a year, or about $132 a week. About $1,238 a year goes for restaurants, or $24 a week – so one trip to Swiss Chalet a week for the average senior couple.

Compare that to what the average couple without children spends. They allocate $728 for those cellphones and $8,860 for food, of which $1,850 goes for restaurants – that’s a few extra nights out.

Ms. Vaz-Oxlade is the first to admit she doesn’t know anybody who has actually tried her experiment. ” I don’t know what they are going to do,” she says of people with no savings.

One thing they’ll do is sell the family home and downsize or get a reverse mortgage. Going from a big city to a small town could cut your costs but that won’t work for all Canadians, Ms. Vaz-Oxlade says.

“You have to eat into the principal.

We like to use the big Toronto numbers for the sale of your home and live off the income story. but that’s not reality for most people;’ she says.

The average house in Canada sold for $363,346 in 2011, according to the Canadian Real Estate Association – meaning a sizeable amount of equity for retirement. The problem is more and more seniors still have some sort of mortgage debt on retirement or other debt like credit cards or consumer loans.

Seniors with debt are becoming more of an issue, says Scott Hannah, executive of the Credit Counselling Societyfinds. He says if you haven’t saved it means everything is on the table.

Are you going to still have two cars or even one car? Are you going to stay in your home? Are you going to be able to help your children?” he says.

The biggest thing seniors might have to give up is the end of their dreams. “The future just isn’t that rosy,” Mr. Hannah says. “They have to give up some of their lifelong goals they had in retirement in terms of activities, goals or places they wanted to travel to.”

Fee-based certified financial planner Jason Heath of E.E.S. Financial Services was looking at the issue for a family friend who recently came to him with the problem of no retirement savings, no pension and no other source of income – just what the government will pay out.

“it’s short of what the average Canadian will spend. If you fall in the situation of having no retirement savings and you live in Toronto, you might have to look to relocate;’ Mr. Heath says, adding that the move from the big city to small town applies across the country. “Even if you do that, it’s going to be awfully tight and a grim forecast for their golden years.”

He says the other alternative, and one he sees happening more, is parents turning to their children for support. Instead of the child living in the basement until his 30s, suddenly the parents are the ones hanging out in an apartment suite of their children’s homes.

Why not? Instead of paying $1200 for an apartment, you pay your kids $500 to move in with them,” Mr. Heath says. “It’s a bit of a way of getting repaid for all the diapers being changed, and maybe it’s only fair for all the kids who continued to stay home.”

The CFP notes a single person is going to have even tougher problems trying to live off that money because he would not be splitting some major costs like housing while doubling up on government benefits. “If you are going to retire with no savings, you better at least have a partner;’ he says,

Mr. Heath says even if you are just five years from retirement, it’s probably worth trying to do something – and that includes downsizing in advance of your employment disappearing. “You realize you are going to have a shortfall so why not reduce your costs to cover the shortfall in the retirement?”

The other solution, of course, is to keep working. “Go to McDonald’s and there are a lot of jobs taken on by retirees,” he says.

Of course, if you are still working, consulting or doing something else you are paid for, that’s not really retirement, says Craig Alexander, chief economist at Toronto-Dominion Bank. But it is increasingly becoming a way to survive.

There are some people who actually may see their standard of living go up in retirement if they haven’t saved. But they are the minority and they most likely have spent their lives living close to the poverty line, Mr. Alexander says.

“Canada has one of the lowest rates of poverty in the industrialized world, and One of the reasons is because of OAS and GIS, which provide a minimum floor which is ‘enough to keep you out of poverty, but not much more;’ he says.

Garry Marr
Financial Post
02 08 2012