The new issue of the BIS Quarterly Review carries some interesting empirical work on debt reduction after crises. The paper is here and the summary is:
Financial crises tend to be followed by a protracted period of debt reduction in the nonfinancial private sector. We find that a period of debt reduction followed 17 out of 20 systemic banking crises that were preceded by surges in credit. Debt/GDP ratios fell by an average of 38 percentage points, returning to approximately the levels seen before the increase. If history is any guide, we should expect to see a much more significant reduction in private sector debt, particularly of households, than has so far taken place after the recent crisis. The costs of this process in forgone output are difficult to pin down, but there are reasons to believe that they need not be high provided that the banking sector problems that led to the crisis are fixed.
4 replies on “Debt Reduction After Crises”
“but there are reasons to believe that they need not be high provided that the banking sector problems that led to the crisis are fixed.”
Hell of a caveat at the end there…
They make it plain that the IMF has an agenda. I do not disgree with it, having had five children ….
In times when a population is busy making money it ceases to make babies. When times are bad there are reductions of fertility unless there is a loss of hope. Decades of debt reduction ahead! Japan style?
Interesting that a lot of the countries mentioned are latin American and that crises are separated by only a few years (argentina for example is cited for 95 and 2000/02). It’s possible to lump latin crises into one large 20 year crisis beginning with the 1982 Mexican default. those countries delevered over a 20 year period through a combination of default, inflation and import substitution. It wasn’t pretty and the poor paid a disproportionately high price. Higher end consumers and savers enjoyed access to foreign markets and they had the luxury of inflation indexed contracts, but poorer people didn’t have those luxuries and so saw a massive decline in purchasing power.
the cycles withint that super cycle were quite dramatic and there were many false dawns but between 1982 and 2002 each p[eak in credit outstanding was lower than the last and each trough was also lower…..makes you think
@Philip when they say ‘they need not be high’ what kind of %’s are we talking about typically?