On the verge of 5 years since the subprime bubble sparked off the worst financial debacle in decades, households on both sides of the Atlantic are still attempting to reduce their excessive debt. This adjustment process promises to be long and arduous; even more so, if possible, in those countries that have yet to consolidate their recovery. Nonetheless, the slump in the economic cycle is not the only reason why the pace of household deleveraging varies substantially from country to country. The aim of this box is, precisely, to establish which factors lie behind this discordance and how this affects each country's growth prospects by comparing the United States, United Kingdom and Spain, three economies that share the regrettable need to overcome the ravages of a burst credit bubble.

During the long boom between the dot.com crisis and the subprime crisis, US, British and Spanish families took advantage of the large amount of low-cost liquidity to spend much more than they earned by considerably increasing their use of credit. Between 2001 and 2007, the level of household debt rose by 80% in the United States; by 87% in the United Kingdom and, in Spain, by 168%; almost doubling in the two Anglo-Saxon countries and tripling in Spain. Although the statistics in absolute terms are revealing in themselves, when considering their sustainability it is more appropriate to measure the indebtedness of households in relation to their earning capacity. So, during this intercrisis period, the household leverage ratio in the United States, measured as the ratio of debt to gross disposable income (GDI), rose by 30 percentage points (p.p.). In the United Kingdom this leverage ratio rose by 52 p.p. and, in Spain, by 58 p.p.

The outbreak of the financial crisis in 2007 and its deterioration in 2008 with the Lehman Brothers bankruptcy marked the start of a deleveraging process that is slowly making progress in each of the economies analyzed. However, the statistics reveal perceptibly different adjustment rates between countries in this case as well. In the United States, the ratio of debt to GDI has fallen by 17 percentage points compared with its peak at the end of 2007. In the United Kingdom, the cumulative adjustment is 14 percentage points, also since its peak. In Spain, however, it has only adjusted by 7 p.p., in spite of having risen much more than in the United States or the United Kingdom over the eight years preceding the bursting of the bubble (see the above graph). According to a recent study by McKinsey,(1) which is based on the Nordic experience in the 1990s, US households should have carried out almost half their deleveraging while both the United Kingdom and especially Spain would be lagging behind.

So the question is why? Why is the deleveraging process progressing more slowly in the United Kingdom and why has the adjustment made in Spain been much less than in the other two countries? Before going into details regarding the causes, we should look at the forces that lie behind this correction and, to this end, we should break down these differences in the gross debt-to-income ratio into two parts: the variation due to the change in outstanding debt, the ratio's numerator, and that caused by the rise in disposable income, its denominator (see the table below). In the case of the United States and the United Kingdom, most of the reduction in the debt ratio during the deleveraging phase can be attributed to improved GDI. In both cases, household disposable income has grown by more than 10% in cumulative terms since the peak of indebtedness in 2007-2008. In clear contrast, Spain's GDI has only risen by 2% since 2008, which cannot account for more than three percentage points of its lag in the debt ratio.

Employment trends are key to explaining the differences in terms of disposable income: while employment has fallen by around 2% since 2007 in the United Kingdom and by 4% in the United States, Spain has seen a 13% drop. However, the trend in wages in the three economies has not been so discordant (+7% in the United Kingdom, +9% in Spain and +10% in the United States). With regard to the numerator's contribution; i.e. the outstanding debt, in the United States and Spain this has fallen by 4% and 3% from the leveraging peaks respectively, while in the United Kingdom it has even risen by 2%. The burden of deleveraging in Spanish households has therefore fallen especially on adjusting the numerator and, in particular, on consumer credit, which has shorter maturities, as mortgage loans are still above the levels of mid-2008.

Given this situation, the United States is bound to be more advanced in its household deleveraging process, both compared with Spain and the United Kingdom. So does this mean that US households have been more disciplined and responsible? Not necessarily. In part, the improved position of US households can be attributed to the higher level of defaults and mortgage foreclosures. These defaults account for almost two thirds of the household debt reduction, or 3 out of the 5 percentage points contributed by this fall to the correction in the leverage ratio.(2) In the United Kingdom and Spain, however, a slower drop in house prices, the reduction in the cost of mortgages, most linked to variable interest rates, and a greater use of refinancing or changes in bank loan conditions have slowed up the number of defaults but will prolong the deleveraging process.

On the other hand, in the United States deleveraging has been accompanied by a rise in public debt that has helped to more readily sustain the growth in income, thereby facilitating private deleveraging. In contrast, both Spain and the United Kingdom are combining private deleveraging with the consolidation of their national accounts. The simultaneous nature of public and private adjustment is another factor that will delay the completion of deleveraging in both countries, although having a central bank that can provide liquidity will help this process in the United Kingdom.

There are still several years of hard work ahead. Reducing debt in a recessionary context is very costly. That's why the faster we get back onto the path of growth, the less painful and shorter the process will be. In those economies, such as Spain, which are also forced to speed up the consolidation of their national accounts due to questions of external confidence, such growth can only come from the external sector. It is also fundamental, and even vital, to speed up the programme of structural reforms as well as the debt correction. Without this injection of oxygen, the deleveraging tunnel might end up being too murky and interminable.