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International Monetary Fund. External Relations Dept.

During the second half of the 1990s, soaring stock markets seemed to many to signal an era of unprecedented growth and profit opportunities and contributed to investment booms in many countries. Corporations in the euro area embarked on such an investment binge and relied increasingly on borrowing as their financing needs quickly outpaced the availability of internal funds and net equity issues. When stock market valuations crashed in 2001 and 2002, corporations were left with high levels of debt. In a recent IMF Working Paper, Albert Jaeger (Deputy Division Chief, European I Department) takes a look at what this legacy of high corporate debt and leverage might mean for future investment spending. He spoke with the IMF Survey about his study.

International Monetary Fund

This Selected Issues paper on the Czech Republic discusses issues relating to the enterprise sector and corporate governance. This includes an overview and assessment of enterprise performance along with a discussion of the concept of corporate governance and its application in the Czech Republic, including how corporate governance practices compare in an international context. The paper discusses issues related to financial sector performance and restructuring. It also takes stock of banking sector developments and performance and reviews financial policy and supervisory challenges, including the definition of policies for bank privatization and the appropriate prudential framework.

Mr. Dmitry Gershenson, Mr. Albert Jaeger, and Mr. Subir Lall

In the years preceding the economic crisis, the corporate sector experienced rapid debt accumulation. The stock of nonfinancial corporation (NFC) debt stands at 112.7 percent of gross domestic product (GDP) on a consolidated basis as of 2015:Q2, one of the largest in the EU. Excessive corporate leverage constrains profitability, resulting in higher nonperforming loans (NPLs) and lower business investment. Yet both banks and NFCs face disincentives to speed up the deleveraging process. The authorities have taken some important steps to facilitate corporate debt restructuring, including enhancing the legal and institutional framework. The current economic and financial environment affords an opportunity to tackle the corporate debt overhang more ambitiously with a standardized bank-led, time-bound framework.

International Monetary Fund. Monetary and Capital Markets Department
This Technical Note discusses the findings and recommendations made in the Financial Sector Assessment Program for Ireland in the areas of nonbank sector stability. Both nonparametric and parametric methods suggest that the residential real estate market in Ireland is close to or moderately below its equilibrium level. Two standard metrics of price-to-income and price-to-rent ratios show that following a protracted period of overvaluation prior to the crisis and a correction afterward, the market has been close to its equilibrium level in recent quarters. Households have deleveraged, but are still highly indebted. The stability analysis results also suggest that vulnerabilities among nonfinancial firms have moderated in recent years.
International Monetary Fund
This Selected Issues paper examines a number of potential factors that may have influenced the short-term behavior of the exchange rate between the Chilean peso and the U.S. dollar during the period of floating exchange rate, including the possible impact of developments in Argentina during 2001. The paper investigates whether copper prices can be successfully forecasted over medium-term horizons, emphasizing the properties of copper prices most relevant in the Chilean context, including for fiscal policymaking. The paper also provides a snapshot of the Chilean banking and corporate sectors.
Ms. Chie Aoyagi and Mr. Giovanni Ganelli
Japan’s high corporate savings might be holding back growth. We focus on the causes and consequences of the current corporate behavior and suggest options for reform. In particular, Japan’s weak corporate governance—as measured by available indexes—might be contributing to high cash holdings. Our empirical analysis on a panel of Japanese firms confirms that improving corporate governance would help unlock corporate savings. The main policy implication of our analysis is that comprehensive corporate governance reform should be a key component of Japan’s growth strategy.
Mr. Jorge A Chan-Lau
This paper finds that systematic default risk, or the event of widespread defaults in the corporate sector, is an important determinant of equity returns. Moreover, the market price of systematic default risk is one order of magnitude higher than the market price of other risk factors. In contrast to studies by Fama and French (1993, 1996 ) and Vassalou and Xing (2004), this paper uses a market-based measure of systematic default risk. The measure is constructed using price information from credit derivatives prices, namely the spreads of standardized single-tranche collateralized debt obligations on credit derivatives indices.
Mr. Se-Jik Kim and Mr. Mark R. Stone
Different levels of corporate leverage are used in this paper to help explain the wide range of post-crisis output adjustment across East Asia. In the model developed here, highly leveraged firms facing a cutoff of capital inflows are threatened by bankruptcy. These firms respond by eliminating investment and selling their capital goods-at a discount-to try to stay afloat. Lower investment and wasteful capital sales shrink the aggregate capital stock, trigger deflationary pressures, and contract overall output. The available data are broadly consistent with the assumptions and predictions of the model.
Mr. Cem Karacadag and Mr. Paul J. Heytens
This paper examines the leverage, efficiency, and debt-repayment capacity of the Chinese enterprise sector using aggregate and firm level data. The cash coverage of interest expense, in particular, is used as a bridge between enterprise finances and banks' asset quality in order to develop insights on banking soundness. The interest coverage analysis corroborates the high level of nonperforming loans in the financial system. This underscores the urgency of hardening budget constraints on state-owned enterprises and stemming the flow of new bad loans by accelerating ongoing structural reforms.