Systemic Bank and Corporate Distress From Asia to Argentina: What Have We Learned?

Abstract

After Mexico’s meltdown in 1994–95, the markets and the policy establishment braced for the next big crisis – widely expected to feature external sovereign bonds. However, the next crisis turned out to be altogether different. A year after the fall of the Thai baht in August 1997, 65% of Thailand’s companies were illiquid, and nearly a quarter were insolvent; non-performing bank loans approached 30% of GDP. The figures were comparable for Korea and even worse for Indonesia, where nearly 80% of all firms were illiquid and 65% were technically insolvent. Yet Asian governments had been running budget surpluses and managed relatively light debt loads. Asia’s was a crisis unlike its Latin American predecessors. With no concern for government debt default, this new kind of crisis manifested itself in widespread runs and defaults on direct cross-border debts of Asian banks and companies. Systemic bank and corporate distress can take different forms and come about in different ways. Bank and corporate crises need not even coincide. For example, in an economy where banks mostly finance the government and companies rely on non-bank funding sources (securities markets, retained earnings or private capital), pervasive corporate failure need