Bailing Out the People? When Private Debt Becomes Public

IMF Working Papers, June 13, 2018

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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, the authors 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.

Excess private debt systematically translates into higher public debt.
The substitution from private to public debt occurs regardless of whether deleveraging follows a crisis or a more orderly adjustment.
Debt migration is driven mainly by growth effects rather than explicit government bailouts.
The net effect on total indebtedness depends on the magnitude of the growth slowdown during deleveraging.

Primary channel: private deleveraging reduces economic activity.
Policy response channel: reduced activity prompts countercyclical government measures, increasing public debt.
Outcome depends on the depth and duration of the growth slowdown during deleveraging.

Policymakers and markets should not treat private and sovereign debt in isolation.
Focus should shift to the total stock of debt in the economy, given the tendency for private debt to become public through growth and fiscal responses.

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

Bailing Out the People? When Private Debt Becomes Public, WP/18/141, June 2018
- Bailing Out the People? When Private Debt Becomes Public, WP/18/141, June 2018 (Markdown version)
- Bailing Out the People? When Private Debt Becomes Public, WP/18/141, June 2018 (PDF)