## IMF Survey: Household Debt Holds Back Recoveries but Restructuring Can Help

_IMF News, April 10, 2012_

## Source details

**Canonical URL:** [IMF Survey: Household Debt Holds Back Recoveries but Restructuring Can Help](https://www.imf.org/en/news/articles/2015/09/28/04/53/sores041012b)

## Other formats

- [Markdown version](/en/news/articles/2015/09/28/04/53/sores041012b/index.md)
- [Structured JSON version](/en/news/articles/2015/09/28/04/53/sores041012b/index.json)
- [Bundle manifest](/en/news/articles/2015/09/28/04/53/sores041012b/bundle-manifest.json)

## Bibliographic details
- Published: April 10, 2012

---

### Key findings from the April 2012 World Economic Outlook
- Housing busts preceded by larger runups in gross household debt—mortgages, personal loans, and credit card debt—are associated with significantly larger contractions in economic activity.
- Household consumption and real GDP fall substantially more, unemployment rises more, and the reduction in economic activity persists for at least five years.
- Household consumption falls by more than four times the amount explained by the fall in house prices in high-debt economies.
- The relationship between household debt and the contraction in consumption holds even for economies that did not experience a banking crisis around the time of the housing bust.
- Economies singled out as facing these dynamics include Iceland, Ireland, Spain, the United Kingdom, the United States, and others.

### Mechanisms driving deeper slumps and weaker recoveries
- Rapid pre-bust credit accumulation combined with house price declines reduces household net worth relative to debt, making mortgage payments harder to service amid falling income and rising unemployment.
- The “potent combination” of prebust household indebtedness and falling house prices explains contraction severity more than house-price declines alone.
- Defaults and foreclosures become endemic in some countries, prompting household deleveraging through paying down debt or defaulting.

### Case studies and historical evidence
- The study includes episodes where housing busts coincided with substantial increases in household debt: the United States in the 1930s and today; Hungary and Iceland today; Colombia in 1999; and three Scandinavian countries (Finland, Norway, and Sweden) in the 1990s.
- Household deleveraging has begun and is most pronounced in the United States.

### Policy responses and their effectiveness
- Macroeconomic policies are a crucial tool to prevent contractions during household deleveraging.
  - Monetary easing: In economies where mortgages typically have variable interest rates (for example, the Scandinavian countries), monetary easing can quickly reduce mortgage payments and avert household defaults.
  - Fiscal transfers: Social safety nets and automatic transfers to households can boost incomes and improve ability to service debt, helping prevent self-reinforcing cycles of rising defaults, declining house prices, and lower demand.
- Limits of macroeconomic stimulus:
  - Nominal interest rates can only be cut down to zero.
  - High government debt may constrain the scope for fiscal transfers.

### Debt restructuring as a policy option
- Government policies that reduce a household’s debt relative to assets and debt service relative to income can be an inexpensive way to mitigate negative effects of deleveraging on economic activity.
- Bold and well-designed household debt restructuring programs (examples: the United States in the 1930s and Iceland today) can significantly reduce the number of household defaults and foreclosures, helping prevent downward spirals of declining house prices and lower demand.
- Restructuring raises the market value of mortgages once they become more affordable; the government can sell them and use the revenue to offset the initial fiscal cost.
- Design trade-offs and risks:
  - If access to programs is overly restrictive, they will not have the intended impact.
  - If programs are too broad and imposed on an already fragile financial sector, they can cause a dangerous credit crunch.

### Publication metadata
- IMF Survey online, April 10, 2012
- Draws on the chapter “Dealing with Household Debt,” published in the April 2012 World Economic Outlook

*Source: IMF Survey: Household Debt Holds Back Recoveries but Restructuring Can Help*

---

## Content in this bundle

- [C3pdf (PDF)](/-/media/websites/imf/imported/external/pubs/ft/weo/2012/01/pdf/_c3pdf.pdf){rel="external" type="application/pdf"}

---

## References

- [https://www.imf.org/en/News/country-focus](https://www.imf.org/en/News/country-focus)
- [PRESS CENTER](http://presscenter.imf.org/)
- [IMF Research](https://www.imf.org/en/news/search)
- [Commodity price swings](https://www.imf.org/external/pubs/ft/survey/so/2012/RES041012A.htm)
- [Blog: Debt hangover](http://blog-imfdirect.imf.org/2012/03/29/debt-hangover-nonperforming-loans-in-europes-emerging-economies/)
- [Debt can reshape current order](https://www.imf.org/external/pubs/ft/survey/so/2012/INT030812A.htm)
- [Confidence crucial to recovery](https://www.imf.org/external/pubs/ft/survey/so/2012/NEW012812A.htm)
- [https://www.imf.org/en/home](https://www.imf.org/en/home)

_Source: https://www.imf.org/en/news/articles/2015/09/28/04/53/sores041012b_