Deleveraging

Deleveraging is the process by which individuals, companies, or entire economies reduce their total debt levels, often by paying off loans, selling assets, or cutting expenditures. It typically occurs after a period of high borrowing, especially when the cost of debt becomes unsustainable due to rising interest rates, falling asset values, or declining income. Deleveraging aims to lower financial risk and restore balance sheets to more stable, manageable levels.

In the corporate and financial sectors, deleveraging often follows economic crises or bubbles. For example, during the 2008 financial crisis, many banks and households were forced to deleverage rapidly after asset prices collapsed and credit tightened. Companies may respond by selling off non-core business units, cutting dividends, or halting expansion plans to preserve cash and reduce leverage ratios like debt-to-equity.

At the macroeconomic level, large-scale deleveraging can lead to slower economic growth, since reduced borrowing and spending dampen demand. However, once deleveraging is complete, it can lay the foundation for more sustainable economic recovery. Economists often distinguish between orderly deleveraging, where debts are reduced gradually, and disorderly deleveraging, which involves rapid selloffs and financial distress that can trigger recessions or deflationary pressures.

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