overborrow

Overborrowing refers to the practice of taking on more debt than an individual, firm, or economy can sustain, resulting in repayment difficulties or financial distress. It can occur in households through mortgages or consumer credit, in corporations via leverage, or at the sovereign level when governments accumulate debt beyond what their tax base and growth prospects can support.

Contributors include optimistic revenue or cash-flow projections, low interest rates and abundant credit, lax lending standards, financial innovation that widens access to debt, and incentives for lenders to extend credit. External shocks, such as a downturn or currency depreciation, can rapidly turn excessive leverage into a solvency or liquidity problem.

Common indicators include rising debt-to-GDP or debt service-to-revenue ratios, deteriorating cash flow metrics, short debt maturities that require frequent refinancings, and a widening spread between borrowing costs and risk-free rates.

Overborrowing raises default risk, increases debt service burdens, reduces fiscal or corporate flexibility, and can trigger financial instability or a debt crisis if accompanied by a loss of confidence or access to credit.

Policy responses focus on strengthening balance sheets and lending standards, macroprudential safeguards to curb excessive credit growth, debt restructuring or forgiveness in extreme cases, and policy credibility to anchor expectations. In international contexts, debt sustainability analyses and relief programs may be employed.

See also: leverage, debt overhang, overextension, default risk, sovereign debt, household debt, corporate leverage.