Abstract
The paper examines recent episodes of government involvement in corporate debt restructurings. It argues that corporate debt restructuring is an important step toward recovery from a financial crisis. Due to interlinkages between the balance sheets of corporations and the financial sector, without an effective corporate debt restructuring, bank lending is likely to remain constrained. We then discuss the rationale for, and modalities of, the state intervention in corporate debt workouts through reviewing six countries with large scale corporate debt workouts. Case studies reveal that the costs of corporate sector rescue are significant and in several cases on par with the costs of financial sector support. The paper sheds light on the importance of contingent liabilities and associated risks to government balance sheet from the corporate debt side and draws conclusions that point to the need for improved surveillance and governance going forward.
Highlights
Pressures from the global economic crisis and resulting tighter credit conditions have given rise to corporate debt problems across the world
The paper examines recent episodes of government involvement in corporate debt restructurings. It argues that corporate debt restructuring is an important step toward recovery from a financial crisis
Rising oil prices and renewed capital inflows have provided some support to the ruble in 2010, the economy remains weak
Summary
Pressures from the global economic crisis and resulting tighter credit conditions have given rise to corporate debt problems across the world. Debt problems have created real risks of disruption of activity/output as stressed corporates have difficulties meeting their working capital needs to secure production. This in some cases led to weaker capacity to service existing debt and further deteriorated the corporations’ balance sheet. Corporate debt problems and the resulting increase in non-performing loans (NPLs) endanger the already weakened banking system and further reduced the ability of banks to extend credit, slowing down the recovery. Realized writedowns or loss provisions: 2007:Q2 2009:Q4 Expected additional writedowns or loss provisions: 2010:Q1 - 2010:Q4
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