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International Monetary Fund. European Dept.
This Selected Issues paper examines the vulnerability of firms in Malta and investigates the effect of their balance sheets on investment in innovation. The results indicate that, while the financial health of medium and large firms has improved in recent years, vulnerabilities remain in the construction sector and for small and medium enterprises. Firms with weaker balance sheets tend to invest less in innovation, even during good times. Policy implications call for (1) accelerating the restructuring of corporate balance sheets of highly leveraged but viable firms, (2) improving the insolvency framework to allow a fast exit of nonviable companies, and (3) expanding corporate funding options for small and medium enterprises, including via nonbank financing alternatives.
International Monetary Fund. European Dept.

appreciation (depreciation). 4/ National accounts basis. 5/ Actual data include the income receipts and expenditures of DMBs in winding up proceedings, and accrued interest payments on intra-company debt held by a large multinational, but estimated and projected data do not. 1 The central objective of PPM is to provide for closer monitoring of the policies of members that have substantial Fund credit outstanding following the expiration of their arrangements. Under PPM, members undertake more frequent formal consultation with the Fund than is

International Monetary Fund. European Dept.

accounts basis. 5/ Actual data include the income receipts and expenditures of DMBs in winding up proceedings, and accrued interest payments on intra-company debt held by a large multinational, but estimated and projected data do not. 1 Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country’s economic developments and policies. On return to headquarters, the

International Monetary Fund. European Dept.

percent of NFC total debt and has increased significantly since 2010 when the bank deleveraging process started. Intra-company debt has risen over the years and represents more than half the stock of total inter-company debt. However, it is worth mentioning that the reliance on inter-company loans is very likely to be a unique characteristic of larger corporations compared with smaller local firms with limited external finance options. Malta: Composition of NFC Debt (In percent of GDP) Source: Central Bank of Malta Malta: Inter-Company Debt (In

International Monetary Fund

the impact on the broader economy). Intra-company debt (or FDI) reduces liquidity risk since parent companies and subsidiaries generally do not want to jeopardize each other’s financial health (FDI flows are more stable than other forms of liabilities; see Brukoff and Rother (2007) for example). Solvency risk . A high level of foreign assets, especially combined with low asset volatility, will reduce solvency risk, since there is less chance net worth can become negative due to valuation shocks (due to currency movements for example). High flows of foreign

International Monetary Fund. European Dept.

.7 4.4 Sources: Statistics Iceland; Central Bank of Iceland; Ministry of Finance; and IMF staff projections. 1/ In percent of potential output. 2/ In percent of labor force. 3/ A positive (negative) sign indicates an appreciation (depreciation). 4/ National accounts basis. 5/ Actual data include the income receipts and expenditures of DMBs in winding up proceedings, and accrued interest payments on intra-company debt held by a large multinational, but estimated and projected data do not. Table 2. Iceland: Money and