Henes: Why Now Is NOT The Time To Focus On Growth

When a company carries too much debt, disastrous consequences may arise for employees and the company itself.

As a result, over-levered companies ultimately negotiate a deal with their creditors to reduce their debt and restructure their enterprises so they can focus on their core business. In that way, they emerge from the restructuring process stronger, leaner, able to survive economic downturns and able to sustain growth.

When done correctly, these companies thrive after restructuring their balance sheets and operations. The focus for these companies is long term stability and growth. This clearly makes good sense.

Today, we are an over-levered nation.

Our government is over-levered, our citizens are over-levered and our corporations are over-levered. Remarkably, the total amount of our credit market debt as a percentage of GDP was 350 percent as of the third quarter of 2008. Today, it is over 400 percent. Compare that to under 270 percent at the height of the Great Depression and the average since 1900 of 185 percent.

We are dangerously over-levered.

This should raise serious issues regarding where our country is headed as our government effectuates bailouts, stimulus packages and the like. It is understandable for the government to want to stop the pain we are experiencing. But, the government may be focused on the wrong things.

The right thing to do - the prudent thing to do - is for our government, citizens and corporations to restructure their balance sheets and reduce their debt. We will not be able to grow again until this is done. Yet, what we hear from the government is that we need to find a way to unlock the credit markets so people and companies can begin borrowing and begin growing.

Focusing on growth at this moment in time may not only be wrong, but it may be dangerous.

To do so, the government either needs to tax or borrow for bailouts and stimulus packages, thereby increasing the national debt level and, if new lending is forced, maintaining our current corporate and individual debt load. This continued borrowing could cause the value of the dollar to decrease dramatically and dangerously and could cause a huge inflationary spike that will continue the current economic pain.

Our focus should be on positioning our country and its corporations and citizens to be strong and, eventually, to grow. To do this, we need to de-lever our nation’s balance sheet. The government, our fellow citizens and our corporations need to get rid of their debt. We need to let this happen. Once the debt is gone, we will be strong and primed to grow again.

And, by the way, our corporations and citizens will be good credits, which will set the stage for banks to start lending again.

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Jon Henes is a partner in the Restructuring Group of the law firm of Kirkland & Ellis. Jon's practice involves representing debtors (including portfolio, privately-held and public companies), creditors' committees and distressed investors (including hedge funds, private equity funds and companies) in acquisitions, restructurings and bankruptcy cases.