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Business and Economics > Corporate Finance

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Cover Departmental Papers
Policy Options for Supporting and Restructuring Firms Hit by the COVID-19 Crisis
Ms. Juliana Dutra Araujo, Jose M Garrido, Emanuel Kopp, Mr. Richard Varghese, and Weijia Yao
This paper presents principles that could guide the design of more targeted policy support and facilitate the restructuring of firms adversely impacted by the COVID-19 pandemic. To this end, the paper takes stock of vulnerabilities and risks in the enterprise sector and assesses countries’ preparedness to handle a large-scale restructuring of businesses. Crisis preparedness of insolvency systems is measured according to a newly designed indicator that includes five dimensions of the insolvency and restructuring regime (out-of-court restructuring, hybrid restructuring, reorganization, liquidation, and the institutional framework). Vulnerabilities tend to be more pronounced in jurisdictions with shortcomings in crisis preparedness, and those countries need to step up efforts to improve their insolvency systems.
Keywords:
Corporate Debt; Solvency Support to Enterprises; Insolvency; Reorganization; Liquidation; Restructuring; COVID-19; policy support scheme; policy option; restructuring firm; nonfinancial firm; solvency support; untargeted support; Solvency; Debt restructuring; Crisis prevention; Corporate sector; Global
Cover IMF Working Papers
The Use of Data in Assessing and Designing Insolvency Systems
Jose M Garrido, Mr. Wolfgang Bergthaler, Ms. Chanda M DeLong, Juliet Johnson, Amira Rasekh, Anjum Rosha, and Natalia Stetsenko
To date, the use of empirical data in insolvency law analysis has been sporadic. This paper provides a conceptual framework for the use of data to assess the effectiveness and efficiency of insolvency systems. The paper analyzes the existing sources of data on insolvency proceedings, including general insolvency statistics, judicial statistics, statistics of insolvency regulators and other sources, and advocates for the design of special data collection mechanisms and statistics to conduct detailed assessments of insolvency systems and to assist in the design of legal reforms.
Keywords:
WP; insolvency system; insolvency case; insolvency administrator report; insolvency data; insolvency framework; insolvency petition; insolvency regulator; Bankruptcy; Insolvency; Statistics; Assessment of Laws; Law Design; Doing business insolvency indicator; insolvency data quarterly; data quarterly; insolvency legislation; insolvency data systems; Solvency; Data collection; Corporate insolvency; Legal support in revenue administration; Nonperforming loans; Europe; Africa; Eastern Europe; Western Europe; Global
Cover IMF Working Papers
Insolvency and Enforcement Reforms in Italy
Jose M Garrido
Italian banks are burdened with high levels of nonperforming loans, the cleanup of which depends in important part on the efficiency of insolvency and enforcement processes. Traditionally, these processes in Italy have taken very long, hampering the timely cleanup of balance sheets. In response, the authorities have legislated a number of measures. This paper explores the recent insolvency and enforcement reforms and the remaining challenges. These reforms introduce important positive changes that are expected to yield full benefits over the medium to long term. The efficacy of the reforms, including to deal with the current stock of high nonperforming loans, can be enhanced by introducing effective out-of-court enforcement mechanisms, supplemented by a more intensive use of informal and hybrid debt-restructuring solutions. Moreover, there is an urgent need to rationalize the system, which over the years has become very complex and intricate.
Keywords:
WP; insolvency; process; enterprise; insolvency process; insolvency administrator; private debt; debt restructuring; enforcement of debt; enterprise insolvency regime; reorganization process; enforcement procedure; insolvency framework; Solvency; Nonperforming loans; Corporate insolvency; Legal support in revenue administration; Western Europe
Cover The Mechanics of a Strong Euro Area
The Mechanics of a Strong Euro Area
IMF Policy Analysis
Ms. Petya Koeva Brooks and Mahmood Pradhan

Abstract

Among member states, many structural weaknesses were exposed when economic performance declined significantly and financial markets became more discerning. This book focuses on the analytical underpinnings of real-time policy advice given to euro area policymakers during four cycles of the IMF’s annual Article IV consultations (2012–15) with euro area authorities.

Keywords:
BOOK; European Central Bank; bank; euro; euro area; area country; household debt; Euro area; securities lending; youth unemployment; Bank resolution framework; Small and medium enterprises; Fiscal stance; Securities; Securitization; Europe; Global; Western Europe; SME securitization; securitization market; IMF staff calculation; investment dynamics; Fiscal union
Cover Staff Discussion Notes
Revitalizing Securitization for Small and Medium-Sized Enterprises in Europe
Mr. Shekhar Aiyar, Mr. Ali J Al-Eyd, Ms. Bergljot B Barkbu, and Andreas Jobst
Small and medium-sized enterprises (SMEs) account for a disproportionate share of output and employment in Europe but are still highly dependent on bank finance, which dried up or became prohibitively expensive during the crisis. Broader access to alternative, long-term finance through securitization would limit their exposure to banking sector difficulties and thus help revive credit. The SDN examines the various impediments to the development of a well-functioning and liquid securitization market in Europe and proposes a comprehensive multi-faceted strategy to support its development through regulatory reforms and infrastructure development together with targeted and time-bound official sector support. This would require (i) greater regulatory differentiation between securities of different quality and underlying asset structures; (ii) harmonized national enforcement and insolvency frameworks and standardized reporting requirements; and (iii) greater capacity of EU authorities to support new issuance. These measures would be underpinned by a pan-European definition of high-quality securitization (HQS) comprising simple, transparent and efficient asset structures receiving preferential regulatory treatment.
Keywords:
SDN; SME securitization; securitization transaction; SME loan; EU country; EU budget; EU initiative; restarting securitization; securitization structure; Structured finance; financial intermediation; macro-financial linkages; SME finance; portfolio funding; asset structure; credit risk; purchase program; EU regulation; EU funds; securitization market; EU resource; EU action; Small and medium enterprises; Securitization; Loans; Credit; Collateral; Europe
Cover IMF Staff Country Reports
Euro Area Policies: Selected Issues
International Monetary Fund. European Dept.
This Selected Issues paper assesses the youth unemployment problem in advanced European economies, especially the euro area. Youth unemployment rates increased sharply in the euro area after the crisis. Much of these increases can be explained by output dynamics and the greater sensitivity of youth unemployment to economic activity compared with adult unemployment. Labor market institutions also play an important role, especially the tax wedge, minimum wages, and spending on active labor market policies. The paper highlights that policies to address youth unemployment should be comprehensive and country specific, focusing on reviving growth and implementing structural reforms.
Keywords:
ISCR; CR; investment; euro area; youth unemployment; securitization market; investment dynamics; area country; labor market feature; creditor economy; Fiscal stance; Current account; Small and medium enterprises; Securitization; Unemployment; Europe; Global
Cover IMF Working Papers
Thin Capitalization Rules and Multinational Firm Capital Structure
Jennifer Blouin, Harry Huizinga, Mr. Luc Laeven, and Gaetan Nicodeme
This paper examines the impact of thin capitalization rules that limit the tax deductibility of interest on the capital structure of the foreign affiliates of US multinationals. We construct a new data set on thin capitalization rules in 54 countries for the period 1982-2004. Using confidential data on the internal and total leverage of foreign affiliates of US multinationals, we find that thin capitalization rules significantly affect multinational firm capital structure. Specifically, restrictions on an affiliate’s debt-to-assets ratio reduce this ratio on average by 1.9%, while restrictions on an affiliate’s borrowing from the parent-to-equity ratio reduce this ratio by 6.3%. Also, restrictions on borrowing from the parent reduce the affiliate’s debt-to-assets ratio by 0.8%, which shows that rules targeting internal leverage have an indirect effect on the overall indebtedness of affiliate firms. The impact of capitalization rules on affiliate leverage is higher if their application is automatic rather than discretionary. Furthermore, thin capitalization regimes have aggregate firm effects: they reduce the firm’s aggregate interest expense but lower firm valuation. Overall, our results show than thin capitalization rules, which thus far have been understudied, have a substantial effect on the capital structure within multinational firms, with implications for the firm’s market valuation.
Keywords:
WP; leverage restriction; interest expense; leverage ratio; interest deductibility; affiliate debt; Thin capitalization rule; Multinational firm; Capital structure; Taxation; rate of inflation; Thin capitalization rules; Domestic debt; Transnational corporations; Stocks; Global
Cover IMF Working Papers
Modeling Banking, Sovereign, and Macro Risk in a CCA Global VAR
Mr. Dale F Gray
The purpose of this paper is to develop a model framework for the analysis of interactions between banking sector risk, sovereign risk, corporate sector risk, real economic activity, and credit growth for 15 European countries and the United States. It is an integrated macroeconomic systemic risk model framework that draws on the advantages of forward-looking contingent claims analysis (CCA) risk indicators for the banking systems in each country, forward-looking CCA risk indicators for sovereigns, and a GVAR model to combine the banking, the sovereign, and the macro sphere. The CCA indicators capture the nonlinearity of changes in bank assets, equity capital, credit spreads, and default probabilities. They capture the expected losses, spreads and default probability for sovereigns. Key to the framework is that sovereign credit spreads, banking system credit risk, corporate sector credit risk, economic growth, and credit variables are combined in a fully endogenous setting. Upon estimation and calibration of the global model, we simulate various negative and positive shock scenarios, particularly to bank and sovereign risk. The goal is to use this framework to analyze the impact and spillover of shocks and to help identify policies that would mitigate banking system, sovereign credit risk and recession risk—policies including bank capital increases, purchase of sovereign debt, and guarantees.
Keywords:
WP; fair value; risk indicator; capital ratio; credit risk; contingent claims analysis (CCA); global vector autoregression (GVAR); senior debt; bank assets; CCA balance sheets; bank risk; bank creditor; market value; bank capital; asset volatility; bank CD; Commercial banks; Credit; Corporate sector; Credit default swap; Global
Cover IMF Working Papers
Dismal Employment Growth in EU Countries: The Role of Corporate Balance Sheet Repair and Dual Labor Markets
Mr. Bas B. Bakker and Mr. Li Zeng
This paper argues that the large differences among EU countries in post-crisis employment performance are to a large extent driven by the need to adjust corporate balance sheets, which had greatly deteriorated during the boom years in some countries but not in others. To close the large gaps between saving and investment, firms reduced investment and cut costs to boost profits. With much of the cost adjustment falling on firms’ wage bills, employment losses were largest in countries under the most intense pressures to improve corporate profitability and with limited wage flexibility due to labor market duality.
Keywords:
WP; profit; profit share; share; labor market; Employment; saving; debt; firms; employment growth; increase variation; labor market duality; share change; Labor markets; Corporate sector; Wages; Baltics; Global; Europe
Cover IMF Staff Country Reports
Spain: Vulnerabilities of Private Sector Balance Sheets and Risks to the Financial Sector Technical Notes
International Monetary Fund
This technical note assesses the vulnerabilities of household and corporate sector balance sheets and quantifies the potential impacts from macroeconomic shocks using sensitivity and contingent claims analyses. The note analyzes the risks to the Spanish financial stability arising from household indebtedness. The analysis expands the use of microlevel data to assess household vulnerabilities, distinguishing between indebted and nonindebted households as well as accounting for the allocation of debt, debt service burden, and households’ income and assets.
Keywords:
ISCR; CR; debt service; balance sheet information; firm industry; credit risk; distressed firm; household debt; earnings before interest and taxes; lender mortgage subrogation; mortgage market; Banco de España; interest rate shock; mortgage debt; economic activity; Mortgages; Income; Housing prices; Loans; Corporate sector; Global; Europe