A vicious cycle of deleveraging occurs when sales of assets to cover losses produce negative balance sheet effects on other firms, causing creditors to call in their loans, which forces further sales of assets and further decreases in prices.

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A vicious cycle of deleveraging can occur when financial difficulties of one firm can spread to other firms through various channels, such as interlocking ownership, common creditors or customers, or contagion effects. As firms try to reduce their debt levels by selling assets, the increase in supply can lead to a decrease in prices, making it harder for other firms to sell their assets and repay their debts. This can trigger a chain reaction of asset sales, price declines, debt defaults, and credit contraction, amplifying the initial shock and causing systemic risks to the financial system.

A Vicious Cycle of Deleveraging Occurs When Sales of Assets