New research by the Bank of England looking at global credit flows seems to support Chancellor George Osborne's call for renewed austerity measures in the UK economy.
The concluding remarks of the paper called,The role of external balance sheets in the financial crisis, sounded similar to Osborne's diagnosis of how the explosion of debt in Britain's economy was instrumental in the financial crisis.
The structure of gross external balance sheets "is important in explaining the incidence of financial crisis across the advanced economies," according to the research.
"High gross external debt, generated by banks and non-banks, was an indicator of subsequent vulnerability," it said
Countries that had experienced strong domestic credit growth partly supported by capital inflows of foreign money, such as the UK and Ireland, had suffered particularly badly.
Furthermore, banks' balance sheets played a critical role in the transmission mechanism of high debt levels between already heavily indebted countries, which made the financial crisis global.
While the paper focused more on consumer and private sector debt as the main driver of economic malaise in advanced economies, it still said that fiscal spending was an important indicator of health in an economy.
The paper "also argues that the country's net current account or net international investment position still contains important information" about an economy's health including the UK's.
Debt and GDP
The research agreed with Osborne's argument that Britain's debt levels were a drag on economic growth: debt had contributed to significant output losses for Britain's GDP in 2009.
High levels of private external debt, rapid domestic credit growth, and a banking sector that is heavily exposed to international capital flows were "statistically significant when included together".
"For most countries the three factors work in the same direction, notably for Ireland and the United Kingdom where they account for around half of the declines in GDP, with private debt making the largest contribution," the report said.
Global Financial System
The paper also compared financial flows across borders between different lenders and creditors in 2007.
UK headquartered banks lent roughly $1.5tn to unaffiliated banks and non-banks in the rest of the world during that year.
Meanwhile, their affiliated offices abroad lent nearly $2.5tn to residents abroad.
Most of this lending was funded by the overseas affiliates themselves, rather than the parent bank in the UK.
"A funding shock to an affiliate overseas might mainly have impacted on its lending to a host country, rather than be transmitted back to the parent company and hence economic activity in the United Kingdom," the report said.
"On the other hand, the fact that an overseas affiliate had experienced funding problems could have indirectly led to funding problems for the parent if the markets interpreted this as a signal about creditworthiness to the bank as whole," it said.
The complexity of the financial system remains a difficulty for policymakers. More attention must be focused on the means of credit expansion, said the research.
Also it was important to work out if there was a mismatch between a nation's debt liabilities and the currencies these were denominated in.
Monetary officials have said the answers to these questions have implications for cross border trade and credit flows between different countries.
"The five or six years since the outbreak of the financial crisis have seen signs of the reversal of some aspects of the greater openness we had seen in the 1980s and 1990s," he said.