Non-financial Private Debt Overhang

Building on the International Monetary Fund (IMF) Global Debt Database (GDD) comprising debts of the public and private non-financial sectors for 190 countries dating back to 1950, Mbaye et al (2018) identify a recurring pattern where households and firms are forced to deleverage in the face of a debt overhang, dampening growth, eliciting the injection of public money to kick-start the economy.

They observe that this substitution of public for private debt takes place whether or not the private debt deleveraging concludes with a financial crisis, and deduce that this is not just a crisis story but a more prevalent phenomenon that affects countries of various stages of financial and economic development. They also find that whenever the non-financial private sector is caught in a debt overhang and needs to deleverage, governments come to the rescue through a countercyclical rise in government deficit and debt. If the non-financial private sector deleveraging concludes with a financial crisis, “this other form of bailout, not the bank rescue packages, should bear most of the blame for the increasing debt levels in advanced economies.”