Fiscal Consolidation and the Cost of Credit: Evidence from Syndicated Loans

February 1, 2013

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Format: Chicago

Senay Agca, and Deniz O Igan. Fiscal Consolidation and the Cost of Credit: Evidence from Syndicated Loans, (USA: International Monetary Fund, 2013) accessed November 21, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

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.

Subject: Credit, Financial institutions, Fiscal consolidation, Fiscal policy, Loans, Money, Public debt, Syndicated loans

Keywords: Cost of credit, Credit, Credit rating, Domestic firm, Economic activity, External finance, Firm variable, Fiscal consolidation, Global, Growth opportunity, Loan spread, Loan spreads, Loans, Monetary policy, Real GDP, Small firm, Sovereign debt, Syndicated loans, Worldscope firm, WP

Publication Details

Pages:

44
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2013/036
Stock No:

WPIEA2013036
ISBN:

9781475564440
ISSN:

1018-5941

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