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

Author/Editor: Senay Agca ; Deniz Igan
Publication Date: February 01, 2013
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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.
Series: Working Paper No. 13/36
Subject(s): Fiscal consolidation | Loans | Credit | Interest costs | Public debt

Publication Date: February 01, 2013
ISBN/ISSN: 9781475564440/1018-5941 Format: Paper
Stock No: WPIEA2013036 Pages: 44
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