Debt overhang
Concept Introduction:
Debt Overhang:
It is a situation when the person’s debt increases and the value of assets diminish due to financial crisis. In such situation people starts to sell their assets in order to raise cash.
Banking crisis leads to decrease in prices of many assets through a vicious circle of deleveraging. To raise cash people starts to sell their assets. This lead to fall in price making the borrowers more distressed. Deleveraging lowers the value of assets which are held by bank in their balance sheets a It also creates problem for others in the economy.
Consider an example of slump in housing that made consumers stuck with debt trap. Banking crisis in such situation leave consumers and businesses with huge debt and declined assets.
The case that led to cutback in spending.
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