This analysis adds new details to the picture of how leverage grew around the world before the crisis, and how the process of reducing it could unfold. We find that
- Leverage levels are still very high in some sectors of several countries--and this is a global problem, just a US one.
- To assess the sustainability of leverage, one must take a granular view using multiple sector-specific metrics. Our analysis has identified ten sectors within five economies that have a high likelihood of deleveraging.
- Empirically, a long period of deleveraging nearly always follows a major financial crisis.
- Historic deleveraging episodes have been painful, on average lasting six to seven years and reducing the ration of debt to GDP by 25%. GDP typically contracts during the first several years and then recovers.
- If history is a guide, we would expect many years of debt reduction in specific sectors of some of the world's largest economies, and this process will exert a significant drag on GDP growth.