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We benefited from invaluable inputs and suggestions at different stages and on earlier versions of this paper from Antonio Antunes, Nuno Alves, Wolfgang Bergthaler, Stijn Claessens, David Grigorian, Kenneth Kang, Albert Jaeger, Luc Laeven, Ana Cristina Leal, Andrea Lemgruber, and Abebe Selassie. We are also grateful to seminar participants at the IMF and Banco de Portugal for the helpful comments. Jonathan Manning, Fernando Martins, and Upaasna Niman provided excellent research assistance. We remain responsible for any remaining errors and for the views expressed in this paper.
Throughout the paper, the Euro area periphery group comprises Greece, Ireland, Italy, Portugal, and Spain. This classification is mainly for presentational purposes, given the different characteristics and circumstances faced by these countries.
Robustness tests for reverse causation from investment to debt give statistically significant results of the expected sign (lower investment is associated to higher leverage and weaker capacity to repay), although they are not economically significant (the impact is quantitatively negligible).
We tested initially for threshold effects beyond Euro area median levels of the debt burden indicators. Firms with above-median ICR levels show, as expected, significantly higher investment ratios. However, above-median leverage levels are not significantly associated with lower investment ratios than below-median ones—possibly due to the already relatively high leverage levels for the median Euro area firm but also subject to the caveats mentioned earlier on the use of “representative firms” data.
The event study relies on alternative data sources: UN, OECD, and Eurostat sectoral accounts statistics, IMF databases (International Financial Statistics, Financial Soundness Indicators, Corporate Vulnerability Utility), and National Authorities.
Crisis countries include Brazil (1998), Czech Rep. (1997), Finland (1990), Indonesia (2000), Japan (1997), Korea (1998), Mexico (1995), Sweden (1990), Thailand (1997), and Turkey (2001). The Argentina and Uruguay experiences of 2002 are not included given the specific crisis characteristics. See also McKinsey (2010) for a review of historic public and private sector deleveraging episodes.
While most companies experienced only a temporary slowdown in fixed capital formation, the investment decline reached over 20 percent in the case of Korea and Finland, the latter with sustained contraction in the 4 years after the crisis.
Fast track court approval procedures refer to procedures under which the court expeditiously approves a debt restructuring plan negotiated between the debtor and its main creditors in a consensual manner before the initiation of insolvency proceedings. This technique draws upon the most significant advantage of a court-approved restructuring plan (i.e., the ability to make the plan binding on dissenting creditors or cram down), while leveraging speedy out-of-court negotiation process.
In the past (e.g. Turkey in 2001), these types of initiatives have tended to be more structured and also included agreement by all or most financial institutions to follow specified procedures and actions in out-of-court restructurings; formal arbitration with specific deadlines; and penalties for non-compliances.
It is important to make tax incentives conditional on completion of the restructuring to avoid misuse. In Turkey, commencement of the legal proceedings to recover the debt was sufficient to qualify for the tax incentives, creating perverse incentives for banks to pursue cosmetic legal action rather than real restructuring.