Good deleveraging is when balance sheets are restructured and bad debts written off. This way, viable businesses and creditworthy households should be able to borrow from healthy banks to fund productive investment. The economy grows and the burden of debt falls.
...insolvency regimes across Southern Europe are too weak and borrower-friendly, and judicial systems too cumbersome, to enable the swift resolution of bad debts. In Italy, Greece and Cyprus, for example, it can take 10 years for a bank to get its hands on its collateral through the bankruptcy courts.
The snag is that this problem may be largely cultural—and therefore more difficult to fix. Many businesses in Southern Europe are family-owned and family-run. These family shareholders may be reluctant to bring in outside capital, preferring to walk away rather than hand over control to financial investors.
At the same time, many equity providers may be wary of taking control of businesses in parts of Europe where governance may be weak and success can often depend heavily on close personal relationships with politicians, officials, banks and suppliers. The alternative is to share control with the existing owners, which private equity is typically reluctant to do.