Overleveraging

Overleveraging occurs when an individual, company, or government takes on too much debt relative to its assets or income. This means a significant portion of its financial structure is financed by borrowed money. While leverage can amplify returns during good times, it also magnifies losses during downturns.

In the corporate world, overleveraging can lead to a company being highly vulnerable to changes in interest rates or its revenue streams. If a company has substantial debt obligations, a decline in profits can make it difficult to service that debt, potentially leading to default or bankruptcy. This can also limit a company's ability to invest in growth opportunities or weather unexpected economic shocks.

For individuals, overleveraging might involve taking on excessive mortgages, personal loans, or credit card debt. This can strain household budgets, making it difficult to cover essential expenses or save for the future. In severe cases, it can result in financial distress, foreclosure, or bankruptcy.

Governments can also overleverage by accumulating large national debts. While government debt can fund essential services and infrastructure, excessive levels can lead to higher borrowing costs, reduced fiscal flexibility, and potential economic instability if creditors lose confidence. The sustainability of debt is a key concern in assessing overleveraging at the sovereign level.

The point at which leverage becomes "over" is subjective and depends on various factors, including industry norms, economic conditions, and risk tolerance. However, a common indicator is when debt service payments consume a disproportionately large amount of an entity's cash flow or income.