Ask any journalist which country is most vulnerable and you get a list ranked by public debt-to-GDP. Italy, France, the US. Ask a central-bank economist and you get a different answer.
What the research says
In Credit Booms Gone Bust (2012), Schularick and Taylor studied 14 advanced economies over 140 years. Their finding: private credit growth predicts financial crises better than any other macro indicator — better than house prices, better than inflation, and substantially better than public debt.
The BIS confirms this in its regular Quarterly Review: the credit-to-GDP gap (deviation from long-term trend) is an early-warning indicator used by central banks to activate macroprudential buffers.
So why all the attention on public debt?
Three reasons why media prefers public debt:
- 1Politically tangible — government spending is a daily topic; private lending is not.
- 2Single number — public debt/GDP is one figure per country, easy to rank.
- 3Misleading intuition — "a country can go bankrupt" feels more immediate than "households can no longer service their mortgages", while the latter has historically caused more crises (S&L 1989, Japan 1991, Asia 1997, US 2008, Eurozone 2010-2012).
What this means for reading macro data
A country with low public debt can be structurally fragile if private debt is high. Conversely, a country with formally high public debt can stay stable if its private sector is healthy. The SGI Index weights private debt 4x heavier than public debt for exactly this reason.
Sources
- Schularick, M. & Taylor, A. (2012). Credit Booms Gone Bust. American Economic Review.
- BIS Quarterly Review, credit-to-GDP gap statistics.
- BIS Working Paper 1003 (2022). Total credit to the private non-financial sector.