Bailing Out the People? When Private Debt Becomes Public

By Samba Mbaye, Marialuz Moreno Badia, Kyungla Chae

June 13, 2018

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Samba Mbaye, Marialuz Moreno Badia, and Kyungla Chae. Bailing Out the People? When Private Debt Becomes Public, (USA: International Monetary Fund, 2018) accessed December 21, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

This paper documents a form of private sector bailout that is much more common (and yet unnoticed) than the typical bank bailout. Building on the newly-created Global Debt Database, we show that excess private debt systematically turns into higher public debt, regardless of whether the credit boom resulted in a crisis or a more orderly deleveraging process. This debt migration operates mainly through growth rather than explicit bailouts: private deleveraging weighs on activity, prompting a countercyclical government response to support economic activity. Ultimately, whether this debt substitution results in a net increase or a net decline of overall indebtedness in the economy depends on the extent of the growth slowdown during the deleveraging spell. These findings suggest that markets and policymakers should move away from looking at private and sovereign debt in silos and pay closer attention to the total stock of debt in the economy, as the line between the two tends to become blurry.

Subject: Debt burden, Emerging and frontier financial markets, Financial crises, Financial markets, Fiscal policy, National accounts, Private debt, Public debt

Keywords: Advanced economy, Bailout, Debt database, Debt ratio, Debt substitution, Definition of Private, Deleveraging, Emerging and frontier financial markets, Financial crisis, Fiscal policy, GDP ratio, GDP trend, Global, Interest rate, Leverage cycles, Leverage flow, Net debt repayment, Nonfinancial private sector, Private debt, Private sector, Public debt, WP

Publication Details

Pages:

45
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2018/141
Stock No:

WPIEA2018141
ISBN:

9781484361658
ISSN:

1018-5941

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