Assessing the private sector deleveraging dynamics

The negative impact of excessively high debt stocks and rapid credit expansion on financial stability and economic growth has become evident during the current financial and economic crisis. The necessary balance sheet adjustment process is still ongoing, with adverse consequences for economic activity. Against this background, analysing the extent of the needed deleveraging, its path and the impact on major macroeconomic and financial aggregates is crucial. The present section contributes to this work (i) by analysing how deleveraging dynamics in the non-financial sector might be influenced by the underlying credit market conditions in the euro area and (ii) by discussing some key conditions that should be in place in order to minimise the impact of deleveraging on economic activity. Overall, the analysis points to strong credit market pressures on both the supply and demand side in some euro area countries. In most of these countries, however, depressed activity means that apparent deleveraging, as measured by debt-to-GDP ratios, is progressing only slowly despite significantly negative credit flows.