Zombies at Large? Corporate Debt Overhang and the Macroeconomy

What are the macroeconomic consequences of business credit booms? Are they as dangerous as household credit booms? If not, why not? We answer these questions by collecting data on nonfinancial business liabilities (primarily bank loans and corporate bonds) for 17 advanced economies over the past 150 years. Unlike household credit, business credit booms are rarely followed by macroeconomic hangovers. Data on debt renegotiation costs—instrumented by a country’s legal tradition—show that frictions to debt resolution make recessions deeper and longer—an important factor in explaining the differences with household credit booms.

Debt Overhang, Gazelles’ Growth, and Fiscal Policy: A Note from the Quantile Regression Approach

The paper aims to examine the relationship between leverage and firm growth and the impact of fiscal policy on this relationship using a panel data quantile regression approach. Employing a sample of gazelles from emerging Europe for the 2006–2014 period, we find that debt overhang negatively affects firm growth only for the lower growth quantiles. In addition, we found that the negative effect is higher for the gazelles located in countries with lower corporate income effective tax rates. However, for the higher growth quantiles, the impact of debt on firm growth is positive and statistically significant. Our results reconcile the mixed results of the previous studies and have practical implications for financing strategies in emerging markets.

External Debt Burdens and Economic Growth: A Vector Error Correction Approach from Nigeria

This study examined the effect of external debt burden on the growth of Nigeria economy. Time series data was sourced from Central Bank of Nigeria Statistical Bulletin from 1986-2019. Nigeria real gross domestic was proxied for dependent variable while debt servicing; external debt stock, debt overhang, debt sustainability and crowd-out effect of external debt were proxies for independent variables. The study employed multiple regression models to estimate the relationship that exists between external debt burden indicators and Nigeria economic growth. Ordinary Least Square (OLS), Augmented Dickey Fuller Test, Johansen Co-integration test, normalized co-integrating equations, parsimonious vector error correction model and pairwise causality tests were used to conduct the investigations and analysis. The study findings revealed that 72 percent of the variations in Nigeria gross domestic products can be explained by the changes in external debt burden indicators. The results indicated a negative coefficient with external debt stock and debt overhang while a positive coefficient with debt sustainability, debt servicing and crowd out effect of external debt on Nigeria gross domestic products. From the findings, the study concludes that external debt burdens significantly affect growth of Nigeria economy. We recommend that the fund borrowed should be effectively managed, the federal government should laydown guidelines in terms of defining the purpose, duration, moratorium requirements and commitments, negotiation among others including conditions for external debt loans. Government should initiate and develop policies that will address the fundamental causes of external debt.

The impact of debt service costs and public debt on private capital formation in South Africa

PurposeThe aim of this paper is to analyse the relationship between public debt, corporate debt service costs and private capital formation in South Africa.Design/methodology/approachTo capture the long-run characteristic of investment, the study adopts the Fully Modified Ordinary Least Squares approach and tests for cointegration using Hansen (1992)'s Parameter Instability test.FindingsWe find that private capital formation increases in domestic debt and decreases in external debt during the pre-crisis period. However, during the period post the Global Financial Crisis, we find evidence of domestic public debt crowding out private capital formation, whereas external debt crowds-in capital formation. Debt service costs are found to reduce investment due to the effect of the debt overhang throughout the period under analysis.Research limitations/implicationsThe paper has important implications for macroeconomic policy. In particular, there is need for deleveraging and allocation of a higher proportion of debt to public infrastructure expenditure which has complementary effects on private investment.Practical implicationsDebt overhang signal that South African firms could be over-leveraged, which hinders future growth prospects. Firms that face high levels of debt should consider debt restructuring.Originality/valueEmpirical studies undertaken to explore this relationship have yielded contradicting results suggesting that the relationship between public debt and private investment is heterogeneous depending on a given economy or prevailing macroeconomic environment. In particular, existing research does not provide evidence on whether recent increases in public debt in South Africa have led to crowding-in or crowding-out of private investment. This paper therefore contributes to empirical literature on the impact of public debt on private investment within a small open economy.

Weaving Disaster

This chapter is entirely devoted to Alamán’s foundation, in partnership with two other men, of an enormous textile factory, Cocolapan, near Orizaba in the state of Veracruz. The enterprise flourished only for a short time in the late 1830s and went into bankruptcy in the early 1840s. It is the thesis of the chapter that like his involvement in silver mining and his purchase of an hacienda, this venture was spurred by his ambition to lift his family back into the ranks of the rich elite of the new republic. But for a variety of reasons it failed, throwing Alamán into tangled bankruptcy litigation leaving him with a large personal debt overhang that undermined his entire economic position to the end of his life. The truth was that he had had little financial capital of his own to invest and was essentially sued by other investors for fraud.