UK Accounting Glossary
At the micro-economic level, deleveraging refers to the reduction of the leverage ratio, or the percentage of debt in the balance sheet of a single economic entity, such as a household or a firm.
Deleveraging is the unwinding of debt. Companies use leveraging (i.e. borrowing) to accelerate their growth or return, however, when a company is concerned about defaulting on its obligations or concerned about rampant losses, it can use deleveraging to lower its risk of default and mitigate its losses. By deleveraging its balance sheet, a company sells off debt to lower its overall risk profile. Deleveraging can have serious financial consequences when a company tries to unwind assets that are illiquid. In this case, deleveraging may mean selling assets at a relatively steep discount. As a result, deleveraging may lead to downward pressure on security and asset prices as more and more companies and/or individuals unwind their positions during the deleveraging process.
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This glossary post was last updated: 7th February 2020.