Debt and deleveraging: The global credit bubble and its economic consequences

The recent bursting of the great global credit bubble not only led to the first worldwide recession since the 1930s, but also left an enormous burden of debt that now weighs on the prospects for recovery. Today, government and business leaders are facing the twin questions of how to prevent similar crises in the future and how to guide their economies through the looming and lengthy process of debt reduction, or deleveraging. To help address these questions, the McKinsey Global Institute launched a research ef fort to understand the growth of debt and leverage before the crisis in different countries, the economic consequences of deleveraging, and the practical implications for policy makers, financial regulators, and business executives. In the course of the research, we created an extensive fact base on debt and leverage1 in each sector of ten mature economies and four emerging economies.2 In addition, we analyzed 45 historic episodes of deleveraging, in which an economy significantly reduced its total debt-to-GDP ratio, that have occurred since 1930.