Title: Financial crisis, leveraged buyouts and reverse ratchet effect

Authors: Jean-Guy Degos

Addresses: University of Bordeaux, IRGO – Research Centre 35, Avenue Abadie – 33072 Bordeaux, France

Abstract: It is obvious that the current economic and financial crisis is neither the first, nor the last, that crisis occurs for multiple reasons, but that it is rare for a crisis to resemble exactly the previous one. As such, it is necessary to try to protect oneself from the crisis in general and the next crisis in particular. The current crisis is a crisis of private consumption, first affecting consumers of durable goods and a crisis of public debt. It may be that the following one will be a crisis of production, concerning more directly the firms. What struck many experts, with this crisis, is the articulation of the currency, the capital and the debt. But can we be sure, now, that all is quite clear with this problem? We answered 'no' and we wanted to show how very simple operations, like the leverage effect or the leveraged management buyout, can have serious consequences and lead to crisis. But in the particular case of leveraged transactions, there are in some cases, as opposed to speculative operations, some safeguards in the form of ratchet effect. A bit like a fire that takes on dramatic proportions or fizzled, LBOs can either be a catalyst for crisis or have no effect on it. This is what we will try to deepen.

Keywords: Basel I Agreement; Basel II Agreement; Basel III Agreement; financial crisis; cycle crisis; subprime mortgage crisis; reverse ratchet effect; leverage effect; debt; LBOs; derivatives; leveraged buyouts; management buyouts.

DOI: 10.1504/IJEA.2015.074566

International Journal of Economics and Accounting, 2015 Vol.6 No.4, pp.365 - 379

Received: 08 May 2021
Accepted: 12 May 2021

Published online: 05 Feb 2016 *

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