Unnecessary to fuss about debts

China's debt problem recently moved into the spotlight when Moody's downgraded the country's sovereign rating. But was the downgrade really warranted?

A high and rising debt-to-GDP ratio, which goes hand in hand with a high and rising leverage ratio, could lead to a financial crisis in three ways.

The first is the deterioration in the quality of financial institutions' assets, and the decline in the prices of those assets. With institutions forced by mark-to-market accounting to write off an equal amount of equity, the leverage ratio rises, leading to a further deterioration in asset quality and decline in asset prices.