What Happens To Debt In A Recession?
Economically difficult times and economic fluctuations can go hand in hand with a recession. But what happens to the debts that existed before? Do these become an additional burden or do they lose their “value”?
The appreciation of money, which can occur during a recession, affects debt and debt differently interest charges the end.
What happens in a recession?
Usually the opposite of a recession is feared - inflation, which affects the purchasing power of money decreases and you can afford less of the same amount of money available than, for example, before you Year.
- In a recession, on the other hand, money appreciates. The initial cause is an economic downturn, i.e. sales are falling, and there is less demand for products and services.
- So dealers find it more difficult to find buyers and therefore often lower prices in order to still be able to sell something. Likewise, it is difficult for companies to continue to generate profits because of falling sales figures and the pressure to reduce prices.
- Instead, austerity measures are initiated and this can also mean that wages will not rise or will not rise. in some cases even sink and layoffs are made. This makes it more likely that unwanted debt will arise.
- Interest rates are also lowered in this economically difficult phase in order to support the economy. This mostly happens on the initiative of the central banks and also affects the debt.
Inflation and deflation are terms that often appear in newspapers and television ...
What happens to the debt
In times of recession, the central banks usually cut interest rates. That means other Banks You can borrow money more easily and "cheaply" from them and pass it on to your own customers at lower interest rates.
- These low interest rates are therefore an incentive to take out loans, invest money and not invest it. However, many tend to postpone purchases because they hope that products will become even cheaper.
- In addition, the favorable interest rates make it easier to repay existing loans. Debt consists not only of interest, but also of the actual amount that has to be repaid in installments.
- Something similar happens with this as with the savings - an appreciation. Just as existing money has greater purchasing power because prices have fallen, so have debts to a certain extent a negative "purchasing power", i.e. what the debtor could have bought from it, takes away to.
- Despite the lower interest rates, loans can become a particular burden, precisely because the Wage development in the recession is rather unfavorable and it quickly happens that the available Income decreases.
