Deleveraging

Deleveraging is the process by which an individual, company, or government reduces its debt by paying off liabilities or selling assets. The goal is to improve financial stability by lowering the debt-to-equity ratio. Deleveraging often occurs after periods of excessive borrowing and is typically undertaken to prevent a financial crisis or during economic downturns. While it leads to long-term financial health, deleveraging can reduce investment and consumption in the short term, potentially slowing economic growth. Deleveraging can be painful, particularly when it involves selling valuable assets at a loss or cutting back on investments. However, it is often necessary to avoid default and maintain financial stability.

Example

After the 2008 financial crisis, many corporations and households began deleveraging by paying down debt and reducing their reliance on credit.