BIS paper argues debt overhang is ‘leading cause’ of sluggish growth

A working paper published by the Bank for International Settlements (BIS) argues recovery from the financial crisis is being held back most by the "overhang" of heavy indebtedness.

Authors Stephanie Lo and Ken Rogoff find in Secular stagnation, debt overhang and other rationales for sluggish growth, six years on the "leading candidate" for explaining the sluggish recovery in many parts of the world is high leverage, which may be a "harbinger" of underlying forces "working against the health of the economy".

The authors stress they are not advocating a programme of austerity: "While prudent fiscal policy is necessary for long-run sustainability, of course this does not necessarily imply a cutback in expenditures during recessionary periods," they write.

Rather, the debt overhang is obscuring other factors that may be at play, including secular stagnation, demographics, uncertainty or policy errors. "Exploring ways to continue advancing private sector deleveraging, without excessively eroding the capacity of the public sector to backstop the system and handle catastrophes, remains an important challenge in restoring growth," they say.