High levels of debt may also impair the ability of firms to smooth employment and investment when an adverse shock hits. High leverage has, for example, been shown to have negative effects on the performance of firms as a consequence of industry downturns (González 2013). High levels of public sector debt can be destabilising.
Strained government finances may, for example, weaken the ability to ensure financial stability (Das et al. 2010, Davies and Ng 2011). Furthermore, high levels of public sector debt may amplify under some conditions the effects of cyclical shocks due to raising sovereign risk (Corsetti et al. 2013).