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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Warning Signs as Global Financial Risks Increase


GFSRBy José Viñals

Versions in عربي (Arabic), 中文 (Chinese), Français (French), 日本語 (Japanese), Русский (Russian), and Español (Spanish)

 

Over the last six months, global financial stability risks increased as a result of the following developments:

  • First, macroeconomic risks have risen, reflecting a weaker and more uncertain outlook for growth and inflation, and more subdued sentiment. These risks were highlighted yesterday at the World Economic Outlook press conference.
  • Second, falling commodity prices and concerns about China’s economy have put pressure on emerging markets and advanced economy credit markets.
  • Finally, confidence in policy traction has slipped, amid concerns about the ability of overburdened monetary policies to offset the impact of higher economic and political risks.

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Reviving Credit in the Euro Area


by Jean Portier and Luca Sanfilippo

A stock in excess of €900 billion of nonperforming loans continue to clutter the European banking system, impeding economic growth. This issue remains a key challenge for policy makers. As we show in our latest Global Financial Stability Report, part of the solution to address this legacy is an upgrade in legal systems. Current inefficiencies—long foreclosure times and insolvency procedures—are a reason for the gap between the value of loans on bank balance sheets and the price investors are willing to pay. A reliable legal environment and an efficient judicial system maximize the value of nonperforming loans (NPLs), reduce the value gap and give banks greater incentive to get NPLs off the books. Our analysis, using time to foreclose as a proxy for effective insolvency regimes, shows there is a large upside for new lending capacity in the euro area (Chart 1).

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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.

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