Wednesday, March 03, 2010

Debt: The Big Hangover Has Only Just Begun


More than $1 trillion of high-yield debt will come due between now and 2015—a big potential weight on the U.S. economic recovery

Whatever the economic indicator—from manufacturing reports to home sales to consumer spending—the message is clear: The U.S. recovery is under way. It will likely be a tepid comeback, but it will still fit economists' definition of a recovery. While most post-World War II recessions have been followed by strong recoveries, economists and business leaders all caution that this time it will be different.

The Great Recession had many causes. Clearly the bursting of the bubble in asset values, particularly U.S. residential real estate, was the main cause of the subprime mortgage crisis and the resultant bust. Those asset valuations did not shoot higher on their own; they were sustained by ever-increasing debt levels that primed the pump and inflated the bubble.

While asset values can evaporate in an instant, the indebtedness assumed to acquire the asset does not. Significant debt can take years and even decades to eradicate. Unless, of course, the debtor goes bankrupt. While filing for Chapter 11 may appear to be a quick solution, it is by no means an easy one. Few debtors are willing to write off their equity unless there is no other alternative.

Whatever the ultimate resolution, the struggle to pay off, refinance, or renegotiate significant debt can be difficult and is always fertile ground for unintended consequences. The challenges for this recovery and indeed for efforts to increase economic growth in the decade ahead will ultimately be whether those consequences are manageable.

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