The extensive rise in corporate leverage during the 2000s led to sluggish recovery in Europe in the aftermath of the 2008 crisis, due to a debt overhang effect. In spite of extensive policy interventions in Europe, both in terms of monetary policy and bank regulation aimed at easing the credit supply to firms, investment remains low, since firms are still going through a process of deleveraging.
Corporate debt is on the rise in Asian countries, with a twist: a significant amount of this debt is in US Dollars. Exchange rate appreciations due to capital inflows into Asian countries will lead firms to take on even more leverage, given the positive net worth shock to balance sheets. There are important lessons from Europe for Asian countries in terms of the detrimental effects of high corporate leverage.
The ECA Lectures are monthly events chaired by Asli Demirgüç-Kunt, Chief Economist for Europe and Central Asia. The Lecture Series brings distinguished academics, policymakers and other experts to the Bank to discuss issues relevant for the Europe and Central Asia region.
The series aims to bring cutting edge research and thinking to challenge and contribute to the Bank’s intellectual climate, and reexamine conventional wisdom in current development theories and practices. Please visit the ECA Chief Economist homepage for more information and details.