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. Continue reading

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.

Continue reading

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.

Continue reading

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).

Continue reading

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.

Continue reading

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.

Continue reading

Debt Hangover: Nonperforming Loans in Europe’s Emerging Economies


By Christoph Rosenberg and Christoph Klingen

Some hangovers take more than a good night’s sleep to get over. It’s been three years since the global economic crisis put an abrupt end to emerging Europe’s credit boom, but neither lenders nor borrowers are in much of a party mood. One key reason: many of the loans so readily dished out before the crisis have now gone sour.

Festering bad loans are a problem on many fronts:  banks, credit supply, economic growth, and people all suffer. Take Japan’s lost decade. There too, a credit boom ended in tears, new lending subsequently went from too much to too little, and a vicious cycle of credit squeeze, declining asset and collateral values, and economic paralysis followed.

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. As can be seen in the chart below, levels in some parts of the Baltics and Balkans are already at par with previous financial crises elsewhere.

Tackling bad loans

Nobody wants this dire script to replay in emerging Europe. Policymakers, bankers, and international financial institutions therefore got together under the Vienna Initiative to identify ways to tackle nonperforming loans. A working group co-chaired by the IMF and World Bank just presented a report that analyzes the problem and offers a way out.

Continue reading

Follow

Get every new post delivered to your Inbox.

Join 1,497 other followers

%d bloggers like this: