SocGen: Historical Deleveraging Methods Inviable in Current Economy

Societe Generale (EPA:GLE) (PINK:SCGLY) (BIT:GLE)’s Cross Asset Research has some interesting facts to share on the history of deleveraging and how it believes that the present episode of financial slow down will extend longer, as compared to earlier disasters seen by economies.

SocGen: Historical Deleveraging Methods Inviable in Current Economy

As proven in history, whenever there is a meltdown in one sector of business, its recovery depends on the leverage relay from another sector that is apparently immune to the crisis. As evidenced in the IT slow down of early 2000’s , where the housing sector acted as a cushion owing to its easy credit conditions and general well-being in business in those times. Today all the major economies are slowing down all over the world and one automatically thinks of the rise of BRIC countries as their savior, the fact is the growth potential of all of the BRICs is not enough to act as a leverage relay in the present economic crisis. For more information read our articles:

Economic Woes of BRICs: Brazil, Russia, India, China

The report also sees tighter regulation policies by the government as a hurdle in the face of reconstitution of a debilitated economy. We see the US and EU countries passing new laws to bring banks under stringent checks and balances every day. While in essence, these regulations are not bad for the economy, but as they try to put holds on the deleveraging process, recovery becomes difficult. The research also emphasizes that for an economy to regain its previous strength, there has to be a backup lender. In Europe, ECB seems incapable of providing any debt demonetization or risk sharing for new defaults. Moreover structural reforms and inflow of investment is a much needed stimulus for a slowed economy.

Looking through the things that can be implemented to bring out deleveraging smoothly, SocGen thinks that each startegy has its own downside. For example while structural reforms to increase debt sustainability can speed up rehabilitation, these plans take time to implement. One of the short term gains from structural reforms is the lower risk premium (especially on sovereign bond yields). Again, it is hard to implement these with the austerity measures that are underway in every major European economy. Similarly financial repression where negative interest rates help to reduce debts, is a viable option but fails to recover economy on its own.

Citing drawbacks and fallacies in the many strategies that have been recommended for the deleveraging process, SocGen goes on to present its own model, which it calls SG 3D. The three D’s refer to Debt Deleveraging Dynamics model.

Briefly SG 3D focuses on government, households, and non-financial corporations to reduce the total debt to 200 percent of GDP. The scenarios projected by this model work on reducing risk premia, which will then smooth out the way for structural reforms.

Societe Generale (EPA:GLE) (PINK:SCGLY) (BIT:GLE)  is one of the oldest banks in France with head offices in Paris. It has branches all over Europe, and provides banking and other financial services.