Deficits and crowding out through private loan spreads

Abstract

Post crisis, bank loan spreads increased and have remained elevated despite central bank actions, low LIBOR rates and observed Treasury yields. Using large syndicated loan dataset, this paper estimates that a 1 percentage point to GDP increase in government deficits increases spreads by around 9 basis points on average. This is consistent with partial crowding out. Weaker country risk ratings, larger loan size also increase spreads. Finally, the paper provides evidence that US deficit spending results in a crowding out of around one-half in loan markets and have some crowding out of loans in other markets.