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Fiscal Consolidation and the Cost of Credit

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  • Senay Agca
  • Deniz Igan

Abstract

We examine how the cost of corporate credit varies around fiscal consolidations aimed at reducing government debt. Using a new dataset on fiscal consolidations and syndicated corporate loan data, we find that loan spreads increase with fiscal consolidations, especially for small firms, domestic firms, and for firms with limited alternative financing sources. These adverse effects are mitigated substantially if consolidations are large, and can be avoided if consolidations are also accompanied with more adaptable macroeconomic policies and implemented by a stable government. These findings suggest that lenders price the short-term recessionary effects in loans but large consolidations can reduce or undo the increase in spreads, especially under favorable country conditions, by signaling credibility and creating expansionary expectations.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 13/36.

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Length: 44
Date of creation: 01 Feb 2013
Date of revision:
Handle: RePEc:imf:imfwpa:13/36

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Related research

Keywords: Fiscal consolidation; Loans; Credit; Interest costs; Public debt; sovereign debt; cost of credit; loan spreads; fiscal consolidations; spending cuts; fiscal policy; tax increases; debt reduction; aggregate demand; fiscal consolidation episodes; government spending; fiscal adjustments; tax changes; government debt; fiscal consolidation efforts; budget deficits; tax policy; sovereign default; repayments; fiscal contractions; expansionary fiscal; capital expenditure; fiscal deficits; domestic economic policies; tax base; expansionary fiscal contractions; capital expenditures; expenditure cuts; public finances; taxation; public sector borrowing; fiscal measures; fiscal discipline; debt market; budget consolidation; government expenditures; fiscal stance; fiscal sustainability; fiscal consolidation on growth; expansionary fiscal consolidations; cuts in government spending; debt � reduction; public borrowing; debt obligations; fiscal indicators; fiscal shocks; government spending shocks;

References

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