Private-sector deleveraging channels: an international comparison

The increase in private-sector debt in the run-up to the Great Recession of 2008 was on a global scale but was particularly acute in the advanced countries. The debt process developed over a prolonged period of macroeconomic stability and intense financial innovation, in which highly favourable monetary conditions and funding availability prevailed. The lengthy period of expansion and leverage ultimately gave rise to an inefficient allocation of resources and the emergence of both domestic and external macrofinancial imbalances (in particular the excessive indebtedness of households and non-financial corporations), whose correction is a necessary condition for resuming a sustained growth path. Foreseeably, the correction of corporate and household balance sheets will run for a long period. First, because in the phase prior to the crisis, the pace of expansion of lending far exceeded the growth in activity, meaning that the level of debt obtained by the private sector was far higher than that recorded in other expansionary periods. And second, because the financial system in many countries was seriously impaired, and experience shows that bank restructuring processes also need a long time. In any event, analysis of past episodes of private debt reduction, such as those in Japan and Sweden, show that the scope and speed of such processes is influenced by various factors such as the support of public policies, developments in the external environment and the ability to bring about gains in competitiveness. That explains why the current nonfinancial private-sector debt reduction process evidences notable differences from country to country, owing both to its intensity and the channels through which it is being routed. This article offers an analysis of how this process is progressing in a selected group of advanced countries – the United States, the United Kingdom, Ireland and Spain – that experienced a marked real estate boom in the previous upturn. The article is structured as follows. Section 2 describes debt reduction dynamics in the 2009-2013 period in the four countries under analysis, highlighting the differences in the intensity of the process and its sectoral pattern. The third section breaks down the reduction in the debt ratio, in each country, in terms of the contributions of growth, inflation, net financing and restructuring, distinguishing between households and firms, and drawing on the information from the financial accounts. The fourth section analyses in greater detail the ongoing re-composition of corporate-sector debt, in terms of company size and productive sectors. A discussion follows of the role of macroeconomic policies and of the degree of correction of external imbalances when explaining the differences in deleveraging channels from one country to another. Finally, conclusions are drawn.