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Fiscal Consolidation and the Cost of Credit: Evidence from Syndicated Loans
Author:
Ms. Senay Agca
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and
Ms. Deniz O Igan
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https://orcid.org/0000-0002-9501-1807
Series:
IMF Working Papers
Volume/Issue:
Volume 2013: Issue 036
Language:
English
Publication Date:
01 Feb 2013
DOI:
https://doi.org/10.5089/9781475564440.001
ISBN:
9781475564440
ISSN:
1018-5941
Pages:
44
Keywords:
WP; real GDP; credit rating; economic activity; external finance; monetary policy; fiscal consolidation; sovereign debt; cost of credit; loan spreads; firm variable; growth opportunity; Worldscope firm; small firm; loan spread; domestic firm; Loans; Syndicated loans; Credit; Global
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IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.
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We examine how the cost of corporate credit varies around fiscal consolidations aimed at reducing government debt. Using a new dataset on fiscal consolidations and syndicated corporate loan data, we find that loan spreads increase with fiscal consolidations, especially for small firms, domestic firms, and for firms with limited alternative financing sources. These adverse effects are mitigated substantially if consolidations are large, and can be avoided if consolidations are also accompanied with more adaptable macroeconomic policies and implemented by a stable government. These findings suggest that lenders price the short-term recessionary effects in loans but large consolidations can reduce or undo the increase in spreads, especially under favorable country conditions, by signaling credibility and creating expansionary expectations.
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Cover IMF Working Papers
IMF Working Papers
ISSN:
1018-5941
Publisher:
International Monetary Fund