The reduction of debt in households and non-financial corporations (put simply, the business sector excluding financial enterprises) in some euro-area member states has been speeding up significantly since 2012. "However, the deleveraging process has not yet been fully completed," according to the January 2017 Monthly Report. Progress has varied widely from country to country and the decline in debt has been driven primarily by the active repayment of debt from current income. By contrast, stock adjustments in the form of write-downs on non-performing loans have played only a minor role.

In recent years, debt ratios - the ratio of debt to income - have fallen, especially in Spain and Portugal. Compared to the respective peaks, there has since been a substantial reduction in the debt ratios among non-financial corporations of just over 50 percentage points in Spain (currently around 130 %) and around 30 percentage points in Portugal (currently around 151 %). In the case of households, debt ratios have declined by 20 percentage points in each country (to around 65 % and 75 %, respectively). "Thus, in both countries, approximately half of the increases in debt ratio recorded between 2000 and the respective peaks have since been cut back," write the Bundesbank's economists.

By comparison, the debt ratio of the non-financial private sector in Germany, Italy and Greece has barely changed in recent years and in France the ratio has even risen slightly. In the euro area as a whole, the debt ratio stood at 164 % in the second quarter of 2016. It has long been on a sideways trend, distinguishing it in part from developments in other large economic areas.

Optimism caused debt to rise

In the years prior to the onset of the financial and economic crisis there was an unsustainable rise in the debt levels of the non-financial private sector in some euro-area countries, according to the Monthly Report. This was due to optimistic income expectations and favourable financing conditions, which has been the case particularly in Spain and Portugal since the 2000s. In the wake of the financial and economic crisis, prospects and assets were reassessed, resulting in households and non-financial corporations in other euro-area member states, too, reducing their debt ratios recently.

Longer recessions due to deleveraging

Deleveraging can have negative repercussions on the real economy and thus also on price developments. This is because, in the adjustment phase, debtors in the non-financial private sector use their income to a greater extent to reduce their debt. Even if this only results in a redistribution from debtors to creditors, this could lead to reductions in macroeconomic consumption and investment, as creditors generally have a lower propensity to spend than debtors. According to the Monthly Report, these are the reasons why deleveraging is especially relevant for economic policy.

Historical studies show that recessions accompanied by large-scale deleveraging last longer on average. "Economic developments in the euro area in recent years, which have been weak by international standards, are therefore likely to be at least partly attributable to the pronounced active repayment of debt from current income and the feedback effects this causes," the Bundesbank's economists write.