These are the good, the bad and the ugly, as The Economist itself stated in a blog a couple of years ago.1 “Good deleveraging” involves banks raising capital and getting rid of impaired assets in a targeted and rapid manner. This approach recognises and corrects the flaws in legacy business models and allows for a relatively swift reallocation of credit to more competitive sectors.
This eventually translates into a more dynamic recovery. “Bad deleveraging” entails an indiscriminate reduction in balance sheet size, regardless of the quality of assets. The main motivation for such adjustments is to reduce indebtedness. And in order to “balance the books”, this process is accompanied by asset shedding. The upshot is a potentially prolonged, across-the-board reduction of credit to the real economy.