This will make capital scarcer and raise long term interest rates for corporates and consumers. The question is, will the savings constraint be so large as to push countries into restricting capital outflows as a defence against rising interest rates at home? If yes, we will have to brace for financial protectionism in the years ahead.
The “positive” deleveraging policymakers seek is a procedure in which the growth of equity allows banks to recognize bad loans and refrain from rolling them over, in turn, freeing resources and allowing banks to provide loans to firms that can use them productively. Again Greece is a prime example of this scenario in action.