Private sector deleveraging in Europe

The current crisis revealed the unsustainable levels of private sector indebtedness, fuelled by a prolonged period of rapid credit expansion during the upturn phase in some EU Member States. The subsequent deleveraging process now taking place, although necessary, stands as a source of concern in terms of its implications for economic activity. Against this background, this paper develops an analytical framework to assess private sector debt sustainability. Our approach revolves around two axes: (i) identifying and quantifying sectorial debt overhang pockets that are likely to generate high deleveraging pressures; and (ii) exploring the interactions between such deleveraging pressures and economic and credit market conditions. Based on the precedent analysis, policy implications are also discussed.