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NO.  31

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Corporate Sector Restructuring
The Role of Government in Times of Crisis

Mark R. Stone

© 2002 International Monetary Fund
June 2002

[Preface]  [Background to the Pamphlet
[The Challenge of Corporate Restructuring]  
[Laying the Foundation]
[Restructuring the Financial Sector]  [Restructuring the Corporate Sector]
[Choosing the Form of Government Involvement]
[Reducing the Role of Government]  [Case Studies
[Conclusions]  [Author Information]


The Economic Issues series aims to make accessible to a broad readership of nonspecialists some of the economic research being produced on topical issues by IMF staff. The series draws mainly from IMF Working Papers, which are technical papers produced by IMF staff members and visiting scholars, as well as from policy-related research papers.

This Economic Issue is based on IMF Policy Discussion Paper PDP/00/7 Large-Scale Post-Crisis Corporate Restructuring, July 2000, on IMF Working Paper WP/00/114 The Corporate Sector Dynamics of Systemic Financial Crises, June 2000, and on IMF Paper on Policy Analysis and Assessment PPAA/98/13 Corporate Debt Restructuring in East Asia: Some Lessons from International Experience, October 1998. Additional material on Japan has been added for this pamphlet. Jeremy Clift of the External Relations Department prepared the text for this pamphlet. Citations for the studies reviewed are provided in the original paper, which readers can purchase from the IMF Publication Services ($10.00), or download from

The views expressed in this publication are those of the author(s) and do not necessarily represent those of the IMF or IMF Policy.

Background to the Pamphlet

This pamphlet is based mainly on evidence collected from nine systemic financial crises where the corporate sector played a key role (Table 1). Real gross domestic product or GDP over the course of these episodes contracted by an average of 6 percent. This set of episodes is not comprehensive. Small countries and some cases with less successful restructuring efforts (Romania and Russia in the early 1990s) are not included. Rather, the nine episodes are each important ones, and data and documentation on them are more readily available. A box on Japan has been added.

Table 1. Large-Scale Post-Crisis Corporate Restructuring Episodes
Country Crisis trough1 Country Crisis trough1
Chile January, 1983 Indonesia May, 1998
Mexico October, 1983 Korea July, 1998
Hungary July, 1992 Malaysia November, 1998
Poland October, 1991 Thailand November, 1998
Mexico July, 1995    

1Crisis trough refers to the month when the level of seasonally adjusted industrial production during the crisis episode was at its lowest.
Source: Author

The Challenge of Corporate Restructuring

Large-scale corporate restructuring made necessary by a financial crisis is one of the most daunting challenges faced by economic policymakers. The government is forced to take a leading role, even if indirectly, because of the need to prioritize policy goals, address market failures, reform the legal and tax systems, and deal with the resistance of powerful interest groups. The objectives of large-scale corporate restructuring are in essence to restructure viable corporations and liquidate nonviable ones, restore the health of the financial sector, and create the conditions for long-term economic growth.

Successful government-led corporate restructuring policies usually follow a sequence. First, the government should formulate macroeconomic and legal policies that lay the foundation for successful restructuring. After that, financial restructuring must start to establish the proper incentives for banks to take a role in restructuring and get credit flowing again. Only then can corporate restructuring begin in earnest with the separating out of the viable from nonviable corporations—restructuring the former and liquidating the latter. The main government-led corporate restructuring tools are mediation, incentive schemes, bank recapitalization, asset management companies, and the appointment of directors to lead the restructuring. After achieving its goals, the government must cut back its intervention in support of restructuring.

Tasks of Restructuring

Corporate restructuring on a large scale is usually made necessary by a systemic financial crisis—defined as a severe disruption of financial markets that, by impairing their ability to function, has large and adverse effects on the economy. The intertwining of the corporate and financial sectors that defines a systemic crisis requires that the restructuring address both sectors together.

Laying the Foundation

Successful restructuring is not possible without a strong foundation established by government action across the spectrum of economic policies.

  • First, overall economic stability must be entrenched to provide the confidence needed for debt restructuring. Stable prices, interest rates, and exchange rates are needed for debtors, creditors, and potential investors to have enough certainty to do business.

  • The scale and nature of corporate distress must be quickly assessed by the authorities, banks, and advisers to determine if the problems are systemic and thus whether the government should take a leading role. The assessment of corporate distress can be based on quick calculations of the debt servicing capacity of the aggregate corporate sector, the demand for bank credit, increases in nonperforming loans, and bankruptcies.

  • A comprehensive strategy for restructuring, encompassing both the corporate and financial sectors, should be drawn up as soon as possible once the crisis is judged to be systemic in scope. The involvement of all interested parties in the formulation of the strategy enhances its credibility, as does transparent presentation of its objectives, tasks, and methods of implementation. Sweden, during its banking crisis of the early 1990s, and Korea, in 1997­98, benefited from the early formulation of comprehensive restructuring strategies.

  • A supportive legal, regulatory, and accounting environment is necessary for successful corporate restructuring. Important legal aspects of restructuring include foreclosure standards, foreign investment rules, and merger and acquisition policies. Regulations governing debt-equity conversions and asset sales often need to be changed to make possible novel and complex restructuring transactions.

  • Corporate governance must be brought up to international standards to provide incentives for viable firms to restructure their balance sheets and maximize their value. Improved governance is needed not only to push managers to restructure the existing debt stock, but also to operate profitably and improve future profit flows. Often liberalization of foreign investment can promote good governance through the importing of international best practices.

  • Closing nonviable corporations will incur social costs that may require offsetting government actions to help the poor and to maintain political support for restructuring. Hungary and Poland took measures to reduce income disparities in the mid-1990s, which reflected more than just corporate restructuring, albeit with mixed success. In East Asia, rudimentary social safety nets at the time of the 1997 Asian financial crisis were expanded to offset the impact of the crises on the poor through income transfers, unemployment-limiting measures, and measures to maintain access by the poor to social services. Social measures should be formulated with the cooperation of corporations and unions.

Restructuring the Financial Sector

Even after the foundation has been laid, corporate restructuring cannot begin to make headway without substantial progress in restructuring the financial sector. The draining of bank capital as part of the crisis will usually lead to a sharp cutback in lending to viable and nonviable corporations alike, worsening the overall contraction. Moreover, banks must have the capital and incentives to play a role in restructuring.

The first task of financial restructuring is to separate out the viable from the nonviable financial institutions to the extent possible. To do this work, financing and technical assistance from international financial institutions can be helpful, as in Indonesia following the 1997 crisis.

Nonviable banks should be taken over by the government and their assets eventually sold or shifted to an asset management corporation, while viable banks should be recapitalized. Banks should be directly recapitalized for normal operation or else, in the absence of strong competitive pressures, they may impede recovery by recapitalizing themselves indirectly through wide interest rate spreads. At the same time the government should ensure that bank regulation and supervision is strong enough to maintain a stable banking sector.

There is a degree of circularity here in that the separation of viable from nonviable banks is helped by completion of the same task for corporations, which itself is aided by financial restructuring. The best way to close this circle seems to be rapid restructuring of the banks because a cutback in bank financing to corporations amplifies the overall contraction, and has irreversible consequences—such as the sale of assets too cheaply.

Restructuring the Corporate Sector

Corporate restructuring can begin in earnest only when banks and market players are willing and able to participate. As with the financial sector, the first task is distinguishing viable from nonviable corporations. Nonviable corporations are those whose liquidation value is greater than their value as a going concern, taking into account potential restructuring costs, the "equilibrium" exchange rate, and interest rates. The closure of nonviable firms ensures that they do not absorb credit or worsen bank losses. However, the identification of nonviable corporations is complicated by the poor overall performance of the corporate sector during and just after the crisis. Viable and nonviable firms can be identified using profit simulations and balance sheet projections, as well as best judgment.

Liquidating nonviable corporations during a systemic crisis usually requires the establishment of new liquidation mechanisms that bypass standard court-based bankruptcy procedures. The bankruptcy code of the United States can be taken as the standard minimal government involvement approach. In practice, however, this code has a strong liquidation bias—some 90 percent of cases end in liquidation, and reorganization takes a long time. Moreover, courts are usually unable to handle a large volume of cases, lack expertise, and may be subject to the influence of vested interests. Giving debtors protection from bankruptcy during mediation proceedings allows corporations that are later judged to be viable to remain operating and enables the orderly liquidation of nonviable corporations. If debtors are protected from bankruptcy, however, monitoring of the corporations is needed to ensure that incumbent managers do not hive off the most profitable assets. Liquidation can be speeded up by special courts or new bankruptcy laws. Hungary introduced a tough bankruptcy law in 1991 under which firms in arrears were required to submit reorganization plans to creditors; if agreement was not reached, firms were liquidated. Also, a standstill on payments to banks during negotiations allows cash-strapped corporations to continue operation while their viability is being decided. Without effective bankruptcy procedures, restructuring can be significantly slowed down, as happened in many of the transition countries, in Mexico in 1995, and especially in Indonesia after the 1997 Asian crisis.

The government must also decide on disposal of the assets of liquidated corporations. Delays in asset disposal tie up economic resources, slow economic recovery, and impede corporate restructuring.

Of course, the balance sheets of viable corporations must be restructured. Restructuring will involve private domestic and foreign creditors, newly state-owned creditors, and asset management corporations, as well as stakeholders such as unions and governments. Usually, balance sheet restructuring takes place through the reduction of debt or through the conversion of debt into equity. Often minority creditors slow debt restructuring by threatening to liquidate the debtor in an attempt to force majority creditors to buy them out on favorable terms. This coordination problem can be avoided by rules that allow less-than-unanimous creditor approval of reorganization plans, which can be enforced by government moral suasion, by prior creditor agreement to a set of principles, or through bankruptcy proceedings.

Early completion of relatively clear-cut transactions can jump-start the restructuring program. Restructuring is often delayed by difficulties in valuing transactions because of economic instability and unreliable corporate data.

Long delays in implementing bankruptcy reforms greatly slowed the large-scale corporate restructuring efforts of the mid- and late 1990s. By early 2000, Mexico had still not completed bankruptcy law reform, even though there had been a sharp drop in bank claims on the private sector since the country's 1995 crisis. In East Asia, ineffectual bankruptcy laws stymied corporate restructuring by allowing nonviable firms to stay afloat, which not only precluded banks from collecting the underlying collateral, but also acted as a disincentive for viable firms to repay their debt—further hurting the banks. Delays in bankruptcy reform are due mainly to pressures from groups and individuals who would be hurt by the liquidation of nonviable firms, as well as by the time needed to bring up to speed legal systems faced with a sudden increase in bankruptcy cases (see Box 2).

Transparency is one positive suggestion for bankruptcy reform: regular government disclosure of all the aspects of restructuring can make clear the impediments put in the way by vested interest groups, and thus lead to public pressure to accelerate reform.

Box 2. Delay in Restructuring Held Back Japan in 1990s

In Japan, after a decade of sluggish economic performance in the 1990s, it was widely recognized that economic performance would not improve and crisis vulnerability would not be reduced without large-scale restructuring of the corporate sector. Corporate leverage remained quite high in Japan, reflecting excessive investment and governance problems.

The low profitability of the corporate sector was linked to the weak balance sheets and operating income of the banks. While important progress has been made in reducing corporate leverage in recent years, this progress was attained not only by an increase in equity, but also by a relatively sharp decline in corporate borrowing, which may limit the scope for economic expansion.

The authorities in 2002 began accelerating the introduction of measures aimed at jump-starting corporate restructuring. Banks and firms were encouraged to agree to out-of-court restructuring in exchange for debt forgiveness or debt-equity conversion, subject to guidelines established by relevant ministries and the business and bankers' associations. The pillars of the new strategy were a new Civil Rehabilitation Law for corporate bankruptcies, new workout guidelines that strengthened the framework for corporate restructuring, and an increased role for the Resolution and Collection Corporation, which was established to facilitate the restructuring of bank balance sheets.

Choosing the Form of Government Involvement

Experience has shown that large-scale corporate restructuring requires the government to take a leading role so as to establish priorities, limit the economic and social costs of crisis, address market failures, and deal with the obstructions posed by powerful interest groups. The government's role in corporate restructuring is highly country-specific owing to its complexities, social consequences, and involvement of different elements of society. Thus, there are relatively few overarching operational principles or obvious ways to organize the policy choices, especially in comparison with other structural policy areas such as capital account liberalization and labor market reform. The approach taken here is to examine five government-led corporate restructuring methods in ascending order of government involvement.

Government Mediation

Government mediation between corporations and banks or between banks is warranted if creditors are unwilling or unable to lead corporate restructuring. Reasons may include a lack of bank capital, excessive negotiating power by either debtors or creditors, or a lack of incentives for banks or corporations to work out debt problems. These factors can prolong restructuring and result in avoidable costs and even the unnecessary liquidation of debtors. To avoid these pitfalls, the government can mediate informally or in a more structured framework. The best known form of official mediation is the "London Approach," which is implemented in the United Kingdom under the aegis of the Bank of England (see Box 3).

The government mediation framework is appropriate if corporate restructuring is limited in scope and the environment supportive. This approach offers flexibility and adaptability, but requires a credible government mediator, macroeconomic stability, and the appropriate regulatory setting—all of which are attributes of the United Kingdom where the London Approach has been successful. This approach has proven to be less useful when there are a great many creditors, especially foreign creditors.

Box 3. The "London Approach" Involves Shared Pain

The "London Approach" used in the United Kingdom is the best known example of official mediation. It constitutes a set of principles, implemented under the aegis of the Bank of England, used to create a standard framework and help corral banks into unanimity. The London Approach is based on the following principles:

  • if a corporation is in trouble banks keep credit facilities in place and do not press for bankruptcy;
  • banks work together;
  • decisions about the debtor's future are made only on the basis of comprehensive information shared among all banks and parties; and
  • seniority of claims is recognized but there is an element of shared pain.

The London Approach is not enshrined formally to avoid excess legality and because the framework needs to be flexible and adaptable and rest on voluntary bank acceptance. The London Approach was applied with the involvement of the Bank of England in over 160 cases during 1989­97.

Adaptability is the strength of the London Approach. Of course, the application of the London Approach to corporate debt restructuring in the United Kingdom is facilitated by the favorable regulatory environment and macroeconomic stability, the negligible role of foreign creditors, and most important the infrequency and small scale of corporate debt restructuring. In this setting, the London Approach, supported by the sound reputation and objectivity of the Bank of England, has proved successful.

Government-Financed Incentive Schemes

Financial incentives through a preset government-financed scheme can help if corporate distress is systemic, market or regulatory failures inhibit restructuring, and the government has adequate fiscal resources at hand. These schemes usually involve insurance or subsidy incentives made available to creditors and debtors on a voluntary basis. Incentives include compensation to creditors for lengthening debt maturities and grace periods, interest rate and exchange rate guarantees, and equity injections. The government must trade off the fiscal costs of the plan against the systemic benefits of alleviating corporate distress. Government strategies were employed by Mexico in the early 1980s and in the mid-1990s, and Chile (see Case Studies on pages 15–20).

Recapitalizing Banks

Bank recapitalization is warranted if corporate debt problems are pervasive enough to undermine the health of the banking system, and if banks are willing and able to restructure corporations on their own. The widespread interruption of corporate loan payments, which usually reflects macroeconomic instability, will reduce and can even wipe out bank capital. If new capital is all that banks need to restructure debt (that is, they have the incentives and capacity for working out loans), and if new private capital sufficient to restore the banks to normal operation is not forthcoming, then public financing is needed to restore bank capital.

A new bank-restructuring agency is typically established to help coordinate the policies needed to ensure the success of recapitalization. The agency must gauge carefully the potentially large fiscal costs of bank recapitalization against the benefits. Existing shareholder equity should be written down before public funds are used to recapitalize banks to ensure that taxpayers do not bear more than their fair share of the burden. Requirements for the restructuring agency to unwind its equity positions upon the meeting of prespecified conditions accelerate the return of banks to private control. Finally, the agency in most cases will play a key role in deciding whether banks should manage their own impaired assets or spin them off into an asset management corporation or other entity.

Recapitalization costs tend to be higher than for the average banking sector crisis, given the severity of systemic financial crises examined here. Bank resolution costs in a typical bank crisis tend to be equivalent to about 7–14 percent of GDP, but in Indonesia it reached more than 50 percent and in Chile 41 percent.

Bank recapitalization is warranted under similar conditions as for government schemes but where banks are better qualified to work out debt. However, recapitalization creates a fresh "moral hazard" problem: that is, banks may have incentive to gamble the new capital on risky loans with the expectation that they will again be recapitalized if these loans do not pay off. Further, newly recapitalized banks holding large equity shares in restructuring corporations may face conflicting objectives. To avoid moral hazard, recapitalization should be complemented by measures that improve bank supervision and governance, especially if banks end up owning a large share of the corporate sector. Tying bank recapitalization to specific bank measures to restructure corporate debt can be helpful.

Asset Management Corporation

A new government-financed asset management corporation is called for if the number of troubled corporations is large and there are microeconomic elements that severely inhibit restructuring. The most important of these are decapitalized and poorly managed banks, a shortfall of bank debt workout expertise, an uneven balance of power between banks and corporations, a lack of corporate capacity and willingness to provide reliable financial information, and, again, adverse systemic consequences. A government-financed asset management corporation can buy bad loans, provide equity to banks and corporations, negotiate with debtors, and take an active financial and operational role in restructuring. If bankruptcy courts are ineffective an asset management corporation can also serve as an out-of-court bankruptcy mechanism, since the passing of legislation and the building of institutional infrastructure for effective bankruptcy procedures can take time. The debt taken on by the asset management corporation can be converted to equity and eventually sold to the public. The asset management corporation realizes economies of scale in the specialized area of corporate debt restructuring and can develop secondary debt markets. Banks benefit from higher capital, while corporations can expect to have their debt restructured more quickly.

Asset management corporations were used in Hungary, Indonesia, Korea, and Malaysia. In East Asia, asset management corporations have taken on large amounts of debt, ranging from the equivalent of 10 to 35 percent of GDP. However, disposal and resolution of the assets have proven to be quite slow. An asset management corporation is appropriate if bank-led debt restructuring is unfeasible, but it also has risks. To be successful, an asset management corporation should have clear and predefined goals and aim to maximize loan recovery, remain clear of politicization, and be sufficiently funded.

Restructuring Director

The complexities of the corporate and financial restructuring efforts of many of the recent corporate crisis countries have led to the appointment of a restructuring director to accelerate the pace of reform. A director can clearly and transparently define the goals of restructuring, overcome excessive leverage by creditors or debtors, marshal and prioritize government financial support, and establish a place at the table for elements of society that might otherwise be excluded. Typically, restructuring directors are appointed by and report to the country's chief executive and oversee mediation efforts, corporate restructuring committees, asset management corporations, and the bank-restructuring agency.

Restructuring directors are a relatively recent development. None of the crisis episodes of the 1980s and early 1990s appear to have had such a director. In Korea, financial restructuring was directed after early 1998 by the Financial Supervisory Commission. The Commission's chairman was a member of the cabinet and reported to the President.

A restructuring director can help accelerate the pace of restructuring when there are a large number of players with conflicting interests and systemic consequences increase the costs of delays. Naturally, there are potential problems with centralizing supervision of restructuring, including excessive politicization and the absence of market incentives to guide decision making. However, as restructuring becomes ever more complicated and the systemic consequences of corporate crisis remain severe, directors may become a more regular feature of large-scale restructuring efforts.

Reducing the Role of Government

The need for the government to first expand and then shrink its role helps explain the long time needed to complete restructuring. The new restructuring institutions are subject to economic and political constraints that force the government to weigh difficult tradeoffs, especially between restructuring's short-term costs (unemployment, dramatic falls in asset prices, learning curve of new corporate managers, for example) and long-term benefits (improved resource allocation, and safer balance sheets). Initially, the crisis atmosphere quells disagreements between interest groups brought on by unemployment and the removal of corporate owners. However, after the crisis passes and economic activity recovers, broad support for reform often wanes. Crucially, the influence of vested interest groups can delay bankruptcy reform and reprivatization that would dilute their ownership.

The completion of restructuring is marked by the sale of most or all of the government's ownership of the private sector, which can grow to large levels after a crisis. Government ownership of the corporate sector can be direct—after the conversion of debt into equity—or indirect via government-owned asset management corporations and government recapitalization of banks. Successful privatization requires a transfer of control not only from the government, but also from current management. The introduction of a strategic investor who, in a small or medium-sized economy, is likely to be a foreign financial institution is usually needed to improve corporate governance.

The successful completion of large-scale corporate restructuring can often take a long time—a minimum of perhaps five years. In Chile, the initiation of restructuring can be marked by the takeover of ailing financial institutions in late 1981, while the last takeovers and debt restructuring programs took place in 1986; the bank privatization and upgrading of the institutional framework was not finished until 1989. By 1998, government ownership of banking sector capital in Poland had been reduced to one-third and foreigners owned 40 percent of bank capital, while for Hungary government ownership was down to 20 percent, with most of the remaining share owned by foreigners.

Delays in restructuring can be costly. The perpetuation of government ownership can inhibit restructuring and long-term growth prospects by obstructing the market forces needed to promote efficiency. In addition, a slow pace of restructuring will lead foreign investment to other, competing countries—a process that may be difficult to reverse. Finally, there are fiscal costs to delaying restructuring especially from inefficient state-owned banks and corporations.

The time needed to complete restructuring can be shortened if the strategy is properly designed. As noted earlier, early and transparent formulation of an overall strategy can build public support, counter the resistance of vested interest groups, and improve policy effectiveness. Rapid establishment of a supporting legal environment is essential. A clear statement of the restructuring goals makes it plain later on when the government should pare back its role and shut down restructuring institutions. Sunset provisions for government restructuring institutions can help limit their lifespans.

Case Studies

Mexico, Early 1980s

During the early 1980s Mexico adopted a government scheme to restructure corporate foreign debt following the disruption of external debt payments and the drying up of new lending in 1982. The government in early 1983 established the foreign exchange risk coverage trust fund known as FICORCA, overseen by the central bank. The main incentive for corporations to participate in FICORCA was that they were able to swap their foreign debt for new peso-denominated debt under a government-guaranteed exchange rate set at the beginning of the operation, and at an extended maturity of 8 years or more with a 4-year grace period.

About $12.5 billion in debt of some 2,000 corporations was restructured under FICORCA. The scheme was run by a staff of around 50, and debt service payments were handled by Mexican commercial banks for a fee. The government assumption of foreign exchange risk resulted in large gains due to the maturity extension of the rolled over debts and the subsequent appreciation of the peso.

FICORCA was generally viewed as a success because the large amount of loans rescheduled under the scheme helped to resolve the problems that confronted the private sector in 1982. FICORCA created a stable environment for debt negotiations, fixed the exchange rate exposure for debtors, gave the debtors breathing space, and allowed for a lower interest rate on the foreign debt than the debtors could get on their own. Moreover, the government did not assume commercial risk. The relatively narrow mandate of the FICORCA scheme, however, meant that it did not have to take on many of the complex challenges faced elsewhere, such as the identification of nonviable firms, domestic debt restructuring, and creditor to creditor and creditor to debtor coordination problems. In addition, the government was exposed to exchange rate risk.


Chile recapitalized banks and implemented government plans to restructure corporate debt during the early and mid-1980s. Debt repayment problems were prompted by a recession during 1981­83 that followed a decade of financial reform and a remarkable surge of financial intermediation. To provide incentives for debt servicing and reestablish a sound banking system, the authorities improved bank supervision and regulation, recapitalized private banks by purchasing substandard loans at par in 1982, 1984, and 1986, and implemented several schemes giving financial incentives for debt restructuring. Specifically, peso- and dollar-denominated debts were rescheduled at a fixed real interest rate (7 percent in 1983, then 5 percent in 1984), and at a longer maturity (10 years and extendable to 15 years), with a grace period of 5 years for principal and one year for interest. Borrowers were allowed to convert at a discount dollar-indexed loans into peso-denominated loans before restructuring them. The central bank provided large subsidies to the banks because the schemes worsened their liquidity and profitability.

The scope of the schemes and bank recapitalization was substantial. By end-1984, 21 percent of domestic credit had been rescheduled on easier terms. Moreover, loans sold by financial institutions to the Central Bank of Chile totaled US$2.9 billion by August 1985.

Debt restructuring, complemented by bank recapitalization and financial sector reform, together with a strong economic recovery in the mid-1980s, contributed to a significant improvement in the liquidity and stability of the corporate and banking sectors. However, the measures can be seen as stretching out the impact of the crisis on the corporate and banking sectors, owing to the apparent lack of incentives for banks to separate viable from nonviable enterprises, as well as the need for multiple bank recapitalization, which reflected the insufficiency of the first recapitalization, and the slow pace of improvements in supervision and corporate restructuring. Further, the central bank experienced large operating losses as a result of the schemes.


Hungary during 1991­95 took several approaches to corporate debt restructuring. Under the tough "bankruptcy" law of 1991, firms with arrears of 90 days or more were required to file for reorganization (referred to as bankruptcy) or liquidation. Debtors then submitted reorganization plans to creditors under supervision of a trustee selected from a list maintained by the government. If agreement was not reached, then the debtor was liquidated. During 1992­93, 5,000 "bankruptcy" cases and 17,000 liquidation cases were filed. Despite the progress under this variation of the government mediation approach, a scheme resembling an asset management corporation was adopted in tandem with the 1993 bank recapitalization (banks were recapitalized four times during 1991­94 for a total of 9 percent of 1993 GDP). Under the new scheme, 55 firms were restructured by government directly, representatives of line ministries took part in the restructuring negotiations, and the State Property Agency (SPA) was given the right to purchase bad debts from banks if no agreement could be reached. All in all, almost one-half of the 603 large loss-making firms were the subject of reorganization or liquidation, but in many cases former managers retained power.

Thus the end result of corporate restructuring in Hungary was mixed; the early mediation approach met with some success, but the high degree of government involvement under the SPA was seen to slow and undermine the effectiveness of restructuring. The multiple and costly bank recapitalizations reflected delays in the improvement of supervision and regulation, the lack of turnover of bank management, and the absence of links between bank recapitalization and corporate restructuring. The slow improvement in corporate performance reflected the inability of the government to restructure or even monitor the corporations that came under its control. However, in the past several years commercial banks have been privatized and progress toward corporate restructuring has been substantial.


Poland successfully adopted elements of the bank recapitalization and government mediation approaches. Bank and corporate restructuring was addressed together in the Enterprise and Bank

Restructuring Program (EBRP) enacted in 1993. The large commercial banks were recapitalized only if they carried out a plan of debtor restructuring that was acceptable to the Finance Ministry. Under these plans, banks had to subject each debtor to liquidation or restructuring ("conciliation"). Conciliation agreements for working out bad loans provided for banks to negotiate a workout agreement on behalf of all creditors subject to the agreement of holders of 50 percent of the debt. The bank kept any loan recoveries and had a greater degree of authority under court-run bankruptcy, giving them further incentives to restructure. Technical assistance subsidies funded by donor agencies were provided for bank workout departments.

Borrowers accounting for 57 percent of loans classified as nonperforming at end-1991 had made full or partial payments by 1994. Furthermore, banks were in a much stronger capital position and had improved their credit evaluation capability, partly owing to measures that improved competition in the financial sector.

Poland's approach appears to have resulted in an economically rational debt restructuring and a healthy banking sector at a relatively low fiscal cost and therefore offers some positive policy lessons. First, corporate debt restructuring and bank reform were effective because they were addressed together in an integrated and transparent plan. Second, conditioning bank recapitalization on corporate restructuring contributed to sounder banks and a more viable corporate sector. Third, government subsidies to banks to develop their debt workout expertise seemed to enhance the timeliness and quality of debt restructuring.

Mexico, 1995­97

Mexico adopted a government scheme and recapitalized banks to facilitate the restructuring of large domestic syndicated loans in 1995. After the existing legal framework and bankruptcy laws proved to be inadequate for the restructuring of the domestic debt of large corporations in the wake of the 1994­95 crisis, the Coordinating Unit for Bank-Enterprise Agreement (UCABE) was established at the initiative of President Ernesto Zedillo in January

1995 to set up guidelines, mediate in negotiations, and provide financial incentives for debt restructuring. This effort was complemented by bank recapitalization—including through the purchase of bad loans by the asset management corporation known as Fondo Bancario Para Proteccion del Ahorro or FOBAPROA—capital market deregulation and improved accounting standards and bank supervision. UCABE consisted of two private sector and two public sector members and a small staff. Only corporations considered viable by the banks and for which the banks requested the assistance of UCABE were eligible. During negotiations, payments were suspended, and a lead bank made binding agreements with the concurrence of banks representing 60 percent of total bank credit. Debtors had to give creditors access to all financial information and creditors had to share information among themselves. Unsustainable debt was paid down through asset divestment, debt-equity conversions, or write-downs. Financial incentives provided through the National Development Bank of Mexico included an equity injection of $9 million for individual restructured corporations, interbank debt-swaps, and loans for working capital. UCABE was formally dissolved on May 1, 1997 after restructuring 31 loans worth about $2.6 billion, and FOBAPROA purchased bad loans equivalent to 15 percent of GDP.

The financial incentives provided by UCABE seemed to facilitate restructuring in the context of rapid improvement in the macroeconomic and external environment and a relatively small number of debtors. The experience of UCABE points to the advantages of a flexible approach explicitly backed by the government and the centralization of information under one entity. However, at the same time poor supervision and a lack of transparency resulted in very large and not yet fully realized costs from the bad loans purchased by FOBAPROA.


In the Asian crisis of 1997–98, Thailand combined several of the restructuring approaches. To encourage banks to restructure their holdings of corporate debt, the classification rules for nonperforming loans after they have been restructured were relaxed. Tax impediments to debt restructuring were removed and the government eased restrictions on foreign participation in the economy.

Financial institutions were recapitalized in several ways. Many finance companies and several banks were closed; others were rehabilitated. Significantly, financial institution recapitalization was linked to the signing of binding agreements with debtors. An asset management corporation was established to work out bank loans. The losses of the Financial Institution Development Fund (FIDF)—the lender of last resort for the finance system—were converted into government debt, while a financial sector restructuring agency auctioned off the assets of closed institutions. A Corporate Debt Restructuring Advisory Committee (CDRAC) was established, chaired by the Bank of Thailand, and including representatives from the financial and corporate sectors. The CDRAC developed a list of financial advisers with expertise in corporate debt restructuring, and approved a nonbinding debt restructuring framework that drew on the London Approach and provided a clear statement of the approach that was expected to be adopted in corporate workouts involving multiple creditors. The Thai Asset Management Corporatation (TAMC) was established in 2001 to manage and resolve distressed corporate loans under special legal powers.

By mid-2001 corporate leverage had not been reduced to below the pre-crisis level. The CDRAC process in corporate restructuring had largely been completed, and the TAMC was expected to take the lead role by acquiring about half (US$30 billion) of the financial system's distressed assets.


Corporate restructuring on a large scale is potentially one of the most challenging tasks faced by economic policymakers. The need for large-scale restructuring arises in the aftermath of a financial crisis when corporate distress is pervasive. The successful completion of restructuring requires a government to take the lead in establishing restructuring priorities, addressing market failures, reforming the legal and tax systems, and, perhaps most important, dealing with obstructions posed by powerful interest groups.

Some general lessons regarding large-scale corporate restructuring that can be drawn from the experience of the countries examined in this pamphlet are as follows:

  • Governments should be prepared to take on a large role as soon as a crisis is judged to be systemic.

  • A sound supporting macroeconomic and legal environment is essential.

  • Measures should be taken quickly to offset the social costs of crisis and restructuring.

  • Restructuring should be based on a holistic and transparent strategy encompassing corporate and financial restructuring.

  • Restructuring goals should be stated at the outset, and sunset provisions embedded into the enabling legislation for new restructuring institutions based on these goals.

  • A determined effort to establish effective bankruptcy procedures in the face of pressures from vested interest groups is essential.

  • The government should pare back its role in the economy after achieving its restructuring goals in order to set the stage for higher growth in the long run.

  • Large-scale post-crisis corporate restructuring takes a minimum of five years to complete, on average.

  • Finally, crisis can ultimately boost long-term growth prospects both by weakening special interests that had previously blocked change, and through the successful completion of corporate restructuring.


Author Information


Mark Stone is a Senior Economist in the Monetary and Exchange Affairs Department of the IMF and the author of papers and articles on the corporate sector, financial crises, and monetary policy. He previously worked for Fleet National Bank and Data Resources, Inc, and he has advanced degrees from the London School of Economics and the University of Wisconsin.

Mark Stone