External Credit Research Articles

The Import Substitution Via the Realization of the Cluster Initiatives in the Region

The Russian Federation’s economic development since 2012 can be described as a difficult phase in the strengthening of international economic relations, the period of the economy’s systematic decline. The main reason is the sanctions of the USA and EU against the Russian Federation. We can assert the situation of the external credit resources lack and the impossibility of previously concluded agreements with major Western suppliers for imports of high-tech equipment implementation. It becomes necessary to implement economic incentives to support the projects of import substitution industries developing and the competitiveness of the Russian export. In this work, the formation of clusters is considered as an effective way of supporting regions of the Russian Federation in providing the aim to produce the competitive products for international food market, tourism sector, construction market and for consumer goods and high technology markets. The capital inflow reduction into the Russian Federation as a result of the ruble savings’ conversion to the dollar – is the reason of the federal and regional import substitution policy development. The next aim is the endorsement of the Russian companies’ technological cooperation with the large foreign corporations.

Ownership Concentration and Corporate Disclosure Choice in Bangladesh

This paper investigates empirically the effect of ownership concentration on corporate disclosure choice in Bangladesh. In an environment of weak enforceability of laws, corporate culture in Bangladesh is characterized by family control and concentrated ownership. Controlling shareholders exercise nearly full control over a firm’s operating and financial policies, including disclosure policies, while maintaining low cash flow rights relative to voting rights. The paper shows that management’s choice of disclosure across key financial elements is discriminatory against external shareholders and bondholders. The findings show that controlling for factors such as age, size, profitability and financial leverage, ownership concentration reduces corporate disclosure. The findings validate the hypothesis of La Porta et al. (1999) that an increasing ownership concentration leads corporate management to adopt a disclosure regime which is biased against external shareholders and creditors.

The Impact of Micro Finance on Rural Households

Micro Finance has become one of the most effective instruments for economic development of the poor. Expansion of rural credit delivery system since 1947 has not changed the dependence of the poor on money lenders ad commission agents. The dependence of the rural poor on non-institutional sources of credit is one of the causes that perpetuate their poverty. The poverty alleviation and government sponsored schemes in banks have problems in implementation, with more Non Performing Assets than of other schemes and therefore failed to deliver the expected results. Thus the rural banking institutions are out of step with changing rural credit. The situation necessitated the formation Self Help Groups for enabling the poor to participate in the process of development. Micro Finance or Micro credit for the poor and women has received extensive recognition as a strategy for poverty reduction and for economic development. Micro finance aims at organizing people particularly around credit and building capacities to manage money. The focus is on getting the poor to mobilize their own funds, building their capacities and empowering them to leverage external credit.

Investment financing in cooperative firms

By general agreement, one of the main obstacles to the growth of producer cooperatives is difficult investment financing, due to inadequate Capitalisation levels and the resulting inability to lodge sufficient collateral with lenders. Moreover, worker-owned firms are considered not very reliable because they suffer from problems of moral hazard and insufficient commitment. Unfortunately, the literature on this issue is not extensive and has weaknesses that are highlighted in the paper. By means of its critical analysis, it is possible to provide evidence that the funding difficulties caused by the particular structure of cooperative firms can be effectively tackled by creating an institutional framework within which cooperatives would be offered a wider range of organizational options comparable to those open to traditional enterprises. Finally, it is proved that the willingness of the members to fund the operations of their cooperative with loan capital may not be enough to mobilize external credit. For member financings to persuade potential providers of funds to place trust in a firm, third-party claims must necessarily qualify as senior debt and be repaid before the claims of the partners are settled.

The predictive accuracy of Sukuk ratings; Multinomial Logistic and Neural Network inferences

The development of Sukuk market as the alternative to the existing conventional bond market has risen the issue of rating the Sukuk issuance. These credit ratings fulfill a key function of information transmission in capital market. Moreover, Basel Committee for Banking Supervision has now instituted capital charges for credit risk based on credit ratings. Basel II framework allowed the bank to establish capital adequacy requirements based on ratings provided by external credit rating agencies or determine rating of its investment internally for more advance approach. For these reasons, ratings are considered important by issuers, investors, and regulators alike. This study provides an empirical foundation for the investors to estimate the ratings assigned using the approach from several rating agencies and past researches on bond ratings. It tries to compare the accuracy of two logistic models; Multinomial Logistic Regression and Neural Network to create a model of rating probability from several financial variables.

Does sovereign creditworthiness affect bank valuations in emerging markets?

We analyse the impact of sovereign rating actions by S&P, Moody's and Fitch on bank valuations in emerging markets. We find strong evidence of a rating channel for the transmission of sovereign risk to bank valuations. Collateral and guarantee channels play modest roles, but are more relevant to countries that experienced positive actions. Positive sovereign actions by S&P have the strongest impact on bank valuations. Both negative and positive new rating information, outlook and watch actions are associated with strong market impact. The findings identify clear evidence of links between emerging market governments’ external credit standing and banks’ market valuation.

Financial Health and Firm Productivity: Firm-Level Evidence from Viet Nam

This paper empirically investigates whether financial health shores up firm productivity. It presents productivity as another driving factor in translating financial development into real economic progress. The authors’ empirical framework employs Levinsohn and Petrin’s (2003) semi-parametric estimation of total factor productivity (TFP) using firm-level panel data during 2002-2008, and incorporates financial health variables into conventional determinants of firm productivity. The findings suggest that liquidity and access to external credit boosts firm productivity, with the latter particularly imperative for exporting and/or importing firms.

The Pitfalls of External Dependence: Greece, 1829–2015

Two centuries of Greek debt crises highlight the pitfalls of relying on external financing. Since its independence in 1829, the Greek government has defaulted four times on its external creditors—with striking historical parallels. Each crisis is preceded by a period of heavy borrowing from foreign private creditors. As repayment difficulties arise, foreign governments step in, help to repay the private creditors, and demand budget cuts and adjustment programs as a condition for the official bailout loans; political interference from abroad mounts, and a prolonged episode of debt overhang and financial autarky follows. We conclude that these cycles of external debt and dependence are a perennial theme of Greek history, as well as in other countries that have been “addicted” to foreign savings. At present, there is considerable evidence to suggest that a substantial haircut on external debt is needed to restore the economic viability of Greece. Even with that, a policy priority for the country should be to reorient, to the extent possible, toward domestic sources of funding.

Sovereign Debt Relief and its Aftermath

This paper studies sovereign debt relief in a long-term perspective. We quantify the relief achieved through default and restructuring in two distinct samples: 1920-1939, focusing on the defaults on official (government to government) debt in advanced economies after World War I; and 1978-2010, focusing on emerging market debt crises with private external creditors. Debt relief was substantial in both eras, averaging 21% of GDP in the 1930s and 16% of GDP in recent decades. We then analyze the aftermath of debt relief and conduct a difference-in-differences analysis around the synchronous war debt defaults of 1934 and the Baker and Brady initiatives of the 1980s/1990s. The economic landscape of debtor countries improves significantly after debt relief operations, but only if these involve debt write-offs. Softer forms of debt relief, such as maturity extensions and interest rate reductions, are not generally followed by higher economic growth or improved credit ratings.

What If Firms Could Borrow More? Evidence from a Natural Experiment

We study the effects of a unique lending program initiated by the Swedish government at the height of the financial crisis that allowed firms to suspend payment of all labor-related taxes and fees. Comprehensive administrative data on all Swedish firms show that firms borrowing from the program have higher rates of debt growth, investment spending, and employment growth compared to otherwise similar firms whose labor taxes were sufficiently low they could not benefit from the program. These results connect the availability of external credit with real activity in entrepreneurial firms in a way that has proved difficult in other settings.

Does CDS Premium Most Predict Sovereign Default Risk?

This paper empirically analyzes the price discovery process between Korean sovereign CDS premium, spread of Korean government debt, Won-Dollar currency swap rate, and Won-Dollar FX rate. With the global financial and fiscal crisis, especially in the U.S. and Euro-zone, the interests in sovereign default risk have risen. Interests in CDS, an OTC credit derivative contract based on debt issuer’s default risk, also have increased. A large number of presses have reported that CDS premium would be the best international market indicator for the default risk taken or transferred. However, internationally the CDS market liquidity has not been sufficient enough to validate its properties. Hence, based on empirics, this paper discusses whether Korean sovereign CDS premium can be considered as an appropriate indicator of sovereign credit risk in the Korean economy. Other largely accepted indices which contain the similar information about Korean economic fundamental and Korean external sovereign credit risk are also analyzed and compared: the spread of Korean government debt, Won-Dollar Currency Swap Rate, and Won-Dollar FX rate. Our findings include: (a) in the price discovery process, Won-Dollar spot rate contributes to the price discovery especially most ‘during the financial crisis period’ and the ‘entire period’ (b) Within the period ‘after the financial crisis’, CDS premium and the other indices have mutual influences on the price discovery process higher than the period ‘before the financial crisis’ (c) while Won-Dollar forward rate shows the similar result with Won-Dollar spot rate, NDF rate and CDS premium make the largest mutual influence on price discovery in the period ‘before the financial crisis.’

Ownership Concentration and Corporate Disclosure in Bangladesh

This paper shows that non-compliance with the mandatory disclosure requirements is pervasive in Bangladesh. This is contrasted with the observation that audit opinion is often unqualified. Given that accounting standards and disclosure rules are weakly enforceable, corporate disclosure practice is de facto discretionary in the country. The present study thus investigates cross-sectional determinants of financial disclosure in corporate annual reports. The findings show that, controlling for factors such as age, size, profitability and financial leverage, disclosure effect of ownership concentration is negative. The findings validate the view of La Porta et al. (1999) that an increasing ownership concentration leads corporate management to adopt a disclosure regime which is biased against the external shareholders and creditors. The findings imply an information problem whereby insiders will likely expropriate outside shareholders in an environment where legal protection of the latter is weak.

Risk Capital and MSMEs in India

Risk Capital is an important instrument for not only start-ups and innovative / fast growing companies but is also critical to those looking at growth. However the sources of risk capital are limited in developing countries. It is encouraging to note that with global integration of economy, emerging markets like India are sought after destinations for successful Private Equity (PE) funds. However, the PE Funds continue to focus on larger investments and bigger corporative units though there are more success stories of software and other new economy enterprises in the medium sector being assisted by Venture Capital (VC) Funds. Non-availability of timely and adequate funds at reasonable cost is one of the most important problems facing the MSME sector. Since the nineties the share of commercial bank credit that goes to the SSI sector is falling (though growing in absolute terms). Some of the major causes for low availability of bank finance to this sector are the high-risk perception, inadequate data and usage of external credit rating (there is need to scale up external ratings), weak corporate financial systems, early stage high transaction cost for small loans and high costs of the banks in lending to MSMEs. The lack of adequate collateral further hampers availability of funds to the sector. In such conditions, making various risk-capital options available to the MSME sector is essential. The paper highlights the capital constraints faced by the MSME sector in India and the associated need for developing a well funded risk capital regime for the sector. The emerging risk capital ecosystem for MSMEs is at a nascent stage and needs adequate support from Government and private sector alike to enable greater entry and spread of the MSME sector. The paper discusses the various risk capital options available internationally and at national level for development of an efficient regime. It also looks at ways to exercise these options given the diverse characteristics of the Indian MSME sector. Some of the major risk capital options available for MSME sector internationally and in India are Venture Capital, Angel Investors, Public Listing, etc. Some of the supplements to risk capital can also be explored, viz., Loan Funds, Guarantee Associations, Micro Finance, etc.

The Risk of Ratings in Bank Capital Regulation

The article analyses the rationale of credit ratings in financial market regulation with a specific focus on bank capital regulation. Specifically, it traces the development of external credit ratings in bank capital regulation and in particular how they became a major component of Basel II. In doing so, it reviews how ratings were used in the structured finance markets before the global financial crisis began in 2007 and how their misuse contributed to the crisis. Because ratings had become an integrated feature in banking and securities market regulation, risk management in financial firms became excessively dependent on their use thereby creating agency problems and increased systemic risks in financial markets. The paper also considers the implications of the use of credit ratings in bank capital regulation for macro-prudential supervision and the control of systemic risks. It highlights the different approaches to the use of credit ratings in bank capital regulation between the European Union and the United States and suggests that the lack of harmonisation in this area could lead to market distortions and systemic risks. Finally the article concludes that credit ratings are inappropriate in prudential bank regulation especially in determining bank regulatory capital and their use should be reconsidered in the Basel III agreement.

The optimal size of the European Stability Mechanism: a cost–benefit analysis

This study presents a core–periphery model to determine the optimal size of the European Stability Mechanism (ESM), building on Jeanne and Ranciere [2011. “The Optimal Level of International Reserves for Emerging Market Countries: A New Formula and Some Applications.” The Economic Journal 121: 905–930]. While the periphery is subject to a probability of losing access to external credit, the core's incentive for setting up an ESM stems exclusively from the spillover effects present in the case of periphery default. The model develops regional best response functions, determining a set of feasible ranges for the total ESM size, given optimal regional contributions. The model is then calibrated to the European Economic and Monetary Union. If costs from default are reasonably high, the probability of the periphery not having access to external credit is sufficiently large, and spillover effects to the core are present, both the core and the periphery have an interest in contributing to the ESM. Calibration and sensitivity analysis suggest that the optimal ESM size is between the current and twice the size of the agreed-upon ESM.

Better Safe than Sorry? CEO Inside Debt and Risk-Taking in Bank Acquisitions

Widespread losses during the recent financial crisis have increased concerns that equity-based compensation for bank CEOs causes excessive risk-taking by banks. Debt-based compensation, so-called inside debt, aligns the interests of CEOs with those of external creditors. We examine whether inside debt induces CEOs to pursue less risky policies. We find a negative relationship between CEO inside debt and the change in default risk following acquisitions. The same results apply when risk is measured by the exposure to loss of taxpayers. The results provide further evidence that executive remuneration is an important area for creditors and policymakers concerned about bank risk-taking.

Firm Productivity, Exchange Rate Movements, Sources of Finance, and Export Orientation

We investigate the level and volatility effects of real exchange rates on the productivity growth of manufacturing firms with heterogeneous access to debt, and domestic and foreign equity markets in Turkey. We find that while exchange rate volatility affects productivity growth negatively, having access to foreign or domestic equity, or debt markets does not alleviate these effects. Furthermore, foreign owned or publicly traded companies do not appear to perform significantly better than the rest. We detect, however, that rm productivity is positively related to having access to external credit. Additionally, we find that while export (inward) oriented firms are aaffected less (more) by exchange rate appreciations, they are more (less) sensitive to exchange rate volatility.

Sovereign debt: the assessment

This article serves as an introduction to two issues of the Oxford Review of Economic Policy, one entitled ‘Sovereign Debt: Understanding Bond Markets During the Eurozone Crisis’ and the second ‘Sovereign Debt: Lessons from the Past, Reforms for the Future’. We begin by documenting recent trends in advanced country sovereign indebtedness and reviewing events that preceded the sovereign debt crisis in the eurozone. The mechanisms through which rising sovereign debt may impact bond yields, economic growth, and inflation are discussed and the evidence for such effects is reviewed. Our discussion highlights that there is no unique threshold beyond which sovereign debt exerts adverse macroeconomic effects, and that in order to understand the consequences of a given debt load one must analyse its structure in terms of internal and external creditors, currency denomination, the time to maturity of the bonds, and the legal code governing debt issuance, as well as various economic and political constraints measuring the fiscal space of the sovereign. We then turn our attention to episodes in which sovereign debt proves excessive and default occurs. We review explanations for the protracted and inefficient nature of defaults and describe some lessons from historical studies examining default outcomes. In the final part of the paper we discuss proposals for averting future debt crises, including jointly issued bonds such as eurobonds, contingent convertible bonds, and elements of a Sovereign Debt Restructuring Mechanism. In the course of our discussion we draw on each of the 11 articles included in the two issues of this journal devoted to sovereign debt.

The catching-up of the banking sector in South-Eastern Europe

The paper reviews the commercial banking sector’s development during the booming years before the current global crisis in Southeast Europe. Based on the analysis of a comprehensive dataset, a common, simplified economic model could be outlined for this period, where GDP growth has been fuelled by rapid credit growth. The latter was boosted both by foreign funding and swift deposit growth volumes. Nevertheless, beside the favourable catch-up process, the level of external imbalances, credit growth and currency mismatches raised sustainability concerns and the risk of overheating.

Concentration measures in risk management

Following the increasing use of external and internal credit ratings made by the Bank regulation, credit risk concentration has become one of the leading topics in modern finance. In order to measure separately single-name and sectoral concentration risk, the literature proposes specific concentration indexes and models, which we review in this paper. Following the guideline proposed by Basel 2 on risk integration, we believe that standard approaches could be improved by studying a new measure of risk that integrates single-name and sectoral credit risk concentration in a coherent way. The main objective of this paper is to propose a novel index useful to measure credit risk concentration integrating single-name and sectoral components. From a theoretical point of view, our measure of risk shows interesting mathematical properties; empirical evidences are given on the basis of a data set. Finally, we have compared the results achieved following our proposal with respect to the common procedures proposed in the literature.