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


Authors: Charles Roxburgh Susan Lund Tony Wimmer Eric Amar Charles Atkins Ju-Hon Kwek Richard Dobbs James Manyika

Copyright © McKinsey & Company 2010

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 effort 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, they created an extensive fact base on debt and leverage1 in each sector of ten mature economies and four emerging economies

In addition, the McKinsey Global Institute analyzed 45 historic episodes of deleveraging, in which an economy significantly reduced its total debt-to-GDP ratio, that have occurred since 1930. 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.

They find that:

  • Leverage levels are still very high in some sectors of several countries—and this is a global problem, not just a US one
  • To assess the sustainability of leverage, one must take a granular view using multiple sector-specific metrics. The 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 ratio of debt to GDP by 25 percent. 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. The findings hold several important implications for policy makers, regulators, and business leaders as they seek to navigate these unprecedented economic conditions and ensure greater financial stability and prosperity for the future.


  • “debt”: the outstanding amount of debt, comparing across countries by measuring it relative to GDP
  • “leverage” : debt relative to assets or income and is measured differently, and often in multiple ways, for each sector.
  • “mature economies”: Canada, France, Germany, Italy, Japan, South Korea, Spain, Switzerland, the United Kingdom, and the United States
  • “emerging economies”: Brazil, China, India, and Russia

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