We assess the eects of reforms in product and labor markets in an econ- omy where credit restrictions and long-term debt combine to produce a persis- tent recession with slow deleveraging following a negative …nancial shock. We show that reforms that reduce markups in product markets stimulate output and employment even in the short run, despite their de‡ationary eects. By favouring a faster recovery of investment and collateral values, product mar- ket reforms bring forward the end of the deleveraging phase. This last eect is missing in the case of labor market reforms, the short-run eects of which are sensitive to the response of trade ‡ows and to debt maturity.