Sluggish Business Investment in the Euro Area: The Roles of Small and Medium Enterprises and Debt

By John C. Bluedorn and Christian Ebeke

Small businesses could be the lifeblood of Europe’s economy, but their size and high debt are two of the factors holding back the investment recovery in the euro area. The solution partly lies in policies to help firms grow and reduce debt.

Our new study, part of the IMF’s annual economic health check of the euro area, takes a novel bottom-up look at the problem. We analyze the drivers of investment using a large dataset of over six million observations in eight euro area countries, from 2003 to 2013: Austria, Belgium, Germany, France, Finland, Italy, Portugal, and Spain. (more…)

Tackling China’s Debt Problem: Can Debt-Equity Conversions Help?

By James Daniel, José Garrido, and Marina Moretti

Version in 中文 (Chinese)

China’s high and rising corporate debt problem and how best to address it has received much attention recently. Indeed, corporate debt in China has risen to about 160 percent of GDP, which is very high compared to other, especially developing, countries.

The IMF’s April 2016 Global Financial Stability Report looked at the issue from the viewpoint of commercial banks and resulting vulnerabilities. Its analysis suggests that the share of commercial banks’ loans to corporates that could potentially be at risk has been rising fast and, although currently at a manageable level, needs to be addressed with urgency in order to avoid serious problems down the road.  Indeed the success in addressing this issue is important for China’s economic transition and, given its size and growing global integration, the world’s economy at large.

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By | April 26th, 2016|Economic research, Finance, IMF, International Monetary Fund, unemployment|Comments Off on Tackling China’s Debt Problem: Can Debt-Equity Conversions Help?

A New Look at the Benefits and Costs of Bank Capital

By Jihad Dagher, Giovanni Dell’Ariccia, Luc Laeven, Lev Ratnovski, and Hui Tong

The appropriate level of bank capital and, more generally, a bank’s capacity to absorb losses, has been a contentious subject of discussion since the financial crisis. Larger buffers give bankers “skin in the game” helping to prevent excessive risk taking and absorb losses during crises. But, some argue, they might increase the cost of financial intermediation and slow economic growth.

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By | March 3rd, 2016|Finance, Financial Crisis, International Monetary Fund, U.S.|0 Comments

Unclogging Euro Area Bank Lending

By Will Kerry and Jean Portier

A year ago our research showed Europe had an €800 billion stock of bad loans.  In our latest Global Financial Stability Report we show that the problem has now grown to more than €900 billion.  This stock of nonperforming loans is concentrated in the hardest hit economies, with two-thirds located in just six euro area economies. The European Central Bank’s Asset Quality Review  confirmed this picture, which revealed that the majority of banks in many of these economies had high levels of nonperforming assets (see chart 1).

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Making Small Beautiful Again: The Challenge of SME Problem Loans in Europe

By Yan Liu, Kenneth Kang, Dermot Monaghan, and Wolfgang Bergthaler

Six years after the global financial crisis, Europe continues to be weighed down by high levels of corporate debt and millions of nonperforming loans. Small and medium-sized enterprises (SMEs) bear a disproportionately heavy burden. Their nonperforming loan ratios are on average more than double those of their larger corporate cousins. This is worrisome. SMEs are the lifeblood of the European economy, comprising 99 percent of all businesses and employing nearly two of every three workers in Europe. Given the importance of smaller businesses to the economy, addressing their problem loans could lay the foundation for a more robust and sustainable economic recovery.

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What a Drag: The Burden of Nonperforming Loans on Credit in the Euro Area

By Will Kerry, Jean Portier, Luigi Ruggerone and Constant Verkoren 

High and rising levels of nonperforming loans in the euro area have burdened bank balance sheets and acted as a drag on bank profits. Banks, striving to maintain provisions to cover bad loans, have had fewer earnings to build-up their capital buffers. This combination of weak profits and a decline in the quality of bank assets, resulting in tighter lending standards, has created challenging conditions when it comes to new lending.

We took a closer look at this relationship and the policies to help fix the problem in our latest Global Financial Stability Report because credit is the grease that helps the economy function.

The stock of nonperforming loans has doubled since the start of 2009 and now stands at more than €800 billion for the euro area as whole (see chart). Around 60 percent of these nonperforming loans stem from the corporate loan book.

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Debt Hangover: Nonperforming Loans in Europe’s Emerging Economies

In emerging Europe, the share of loans classified as nonperforming—many of them household mortgages—have exploded from 3 percent before the crisis to 13 percent at the peak. NPLs in some parts of the Baltics and Balkans are already at par with previous financial crises elsewhere. Our analysis finds evidence that nonperforming loans are indeed a serious drag on credit supply and economic growth. They drive up banks’ funding costs and interest margins, and at the same time drain their profits and capital. On the credit demand side, over-extended households and businesses are reluctant to consume and invest.

No End in Sight: Early Lessons on Crisis Management

In times of crisis, choices must be made. In the most recent global economic crisis, policymakers moved quickly to stabilize the system, providing massive financial support, which is the right response in the beginning of any crisis. But that only treated the symptoms of the global financial meltdown, and now a rare opportunity is being thrown away to tackle the underlying causes. In our new paper, we analyze the policy choices made during the crisis and compare them to a number of past ones. It turns out the phases of this crisis followed the same pattern as previous ones, but policymakers made different choices this time around. This post lays out the lessons that we should learn.

Reviving Credit Growth in the Caucasus and Central Asia: What Can Policymakers Do?

The global financial crisis has led to mounting stress in the banking systems of most countries in the Caucasus and Central Asia. Private sector credit growth has slowed sharply and even turned negative in real terms in a number of countries, compared with the dramatic increases, ranging from 40 to 80 percent in the period immediately prior to the crisis. The credit slowdown is weighing on economic activity and having policymakers seek ways to restore it, thereby laying the foundation for a resumption in high and sustainable economic growth.

By | June 7th, 2010|Asia, Economic Crisis, Financial Crisis, IMF|4 Comments
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