Debt Overhang

[Eugine]

Debt overhang is a term originally coined to describe a financial situation where a company is so deep in debt that it cannot embark on new projects because any earnings from those projects will promptly be taken by creditors. The company has no incentive to move forward on investments because they will generate no profits, but it also cannot repay its debt because it is not making enough money to do so. Economists have also applied this model to national governments and their economies, showing how debt overhang can become a significant barrier to economic development. Individuals can also experience a form of debt overhang.

[cloudyclay]

I wonder how many companies have rebounded from their 'debt overhang' since the markets have rebounded. From what I hear, in California (and in other areas of the country as well), homes for sale are starting to rebound. I am not an expert, but I'd imagine that the homeowners who held out and rode out the big dip in home prices will be the ones who will benefit when things shake out. My prediction: A lot of people who are currently underwater will get their heads above the water line sometime in 2013.