Leveraging and Deleveraging: Pluses and Minuses

As in physics, leverage is an amplifier. In business, the leverage is amplifying the losses or the gains. In good times, leverage is good, it is busting the gains, it supports economic growth. Companies and governments are using leverage at large scale. In bad times, it is busting the losses. Companies and governments will have to deleverage. This paper aims to present in brief the concepts of leveraging and deleveraging, to explain why companies, banks and governments are using the leverage, and what are the consequences of using it? The high degree of leverage is one cause of a financial crisis and therefore deleveraging is usually following a financial crisis. We will address the issues of leverage and deleverage both on micro and macro level. Deleveraging entails not only risks, but also opportunities, notably the chance to strengthen financial stability. The opportunities at both macro and micro levels are more likely to materialize if the deleveraging process unfolds in an orderly manner and not in the context of increased stress and risk aversion.