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The structure of external financing: Is there a reason to worry about financing through debt?

Listed author(s):
  • András Komáromi


    (Magyar Nemzeti Bank (central bank of Hungary))

Hungary’s external balance indicators improved a great deal in 2007. Simultaneously, however, the external debt ratio also rose which, in an international climate of uncertainty stemming from the sub-prime crisis, drew investors’ attention to the structure of the country’s external financing. This study argues that the recent increase in debt-creating external financing does not necessarily increase risks associated with sustainability. On the one hand, the record rise in debt-creating financing in 2007 is largely due to one-off items. On the other hand, the waning significance of non-debt-creating financing is not attributable to declining inflows but rather mostly to residents’ stepped up capital exports, which is partly a result of the development in the institutional investor sector, and partly of the foreign expansion of a few large resident companies. The picture becomes even more intricate as according to recent research, the advantages generally associated with non-debt-creating financing are not always supported by findings, and empirical experience indicates that more developed countries are often characterised by a higher share of debt-type external liabilities. Naturally, and irrespectively of the structure of financing, Hungary’s high level of net foreign liabilities in an international comparison continues to be a strong risk factor.

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Article provided by Magyar Nemzeti Bank (Central Bank of Hungary) in its journal MNB Bulletin.

Volume (Year): 3 (2008)
Issue (Month): 1 (April)
Pages: 14-23

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Handle: RePEc:mnb:bullet:v:3:y:2008:i:1:p:14-23
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