Private sector deleveraging: where do we stand

This focus section contributes to the debate on private sector deleveraging by reviewing the adjustment achieved so far in household and corporate indebtedness, by estimating remaining deleveraging needs and by discussing their materialization in the coming years. The main findings of the analysis can be summarised as follows. First, deleveraging of firms and households is under way in many Member States but the adjustment process still has a long way to go given the magnitude of the debt increase before the crisis. Second, the fall in household and corporate debt-to-GDP ratios, which picked up pace in 2013, has been increasingly driven by negative credit flows. This process, which we term ëactive deleveragingí, has had adverse knock-on effects on economic activity and asset markets. Third, the remaining deleveraging needs are still high, including in economies that have already deleveraged by a considerable amount. We estimate that corporations and households in several vulnerable countries may still need to cut their debt-to-GDP ratio by at least 30 percentage points. Elevated credit market deleveraging pressures, often compounded by fragilities due to the distribution of debt, are likely to force this adjustment to occur mostly through active debt repayment over the short-to-medium term, with negative effects on economic activity in the years to come. To ease the adjustment process and minimise its economic and social impacts, additional policies to boost growth and restore inflation to normal levels should be considered in tandem with policies to strengthen bank balance sheets and to improve the functioning of insolvency frameworks.