The IMF gets behind debt reduction as a viable strategy

Debt reduction can work. How about a little debt reduction for my behind?!

The IMF has said that targeted household debt reduction policies - including mortgage write-downs - can deliver significant economic benefits.

The International Monetary Fund made the comments in its latest World Economic Outlook.

The IMF said such policies can substantially mitigate the negative effect of household deleveraging on economic activity. 

The report noted the well established link between high levels of household debt run up during a housing boom, and the effect of a high debt overhang on economic recovery.
It found that countries, like Ireland, that saw house prices and household borrowing skyrocket, saw a longer than average period of recession after the bursting of the housing bubble.  

A large part of this protracted recession it said is due to households trying to reduce their debt levels, which in turn leads to less spending in the economy, driving the recession deeper and further. 

"Because debt is acting as a brake on economic growth, it is important to unstick the brake" said the report's author Daniel Leigh. 

The IMF has studied the response of a number of countries to situations where large parts of the population are burdened with high mortgage debt in a recession, and finds that such programmes can help prevent self-reinforcing cycles of falling house prices and lower aggregate demand. 

"Such policies are particularly relevant for economies with limited scope for expansionary macroeconomic policies and in which the financial sector has already received government report", notes the conclusions. Ireland meets both these criteria. 

The report highlighted what it calls the "bold " household debt reduction programmes implemented in the US in the 1930's and in Iceland in this crisis, which it said can "significantly reduce the number of household defaults and foreclosures and substantially reduce debt repayment burdens''.