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Countercyclical Foreign Currency Borrowing: Eurozone Firms in 2007-2009

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  • Philippe BACCHETTA

    (University of Lausanne and Swiss Finance Institute)

  • Ouarda MERROUCHE

    (University of Lausanne and CEPR)

Abstract

Despite international financial disintegration, we document a dramatic increase in dollar borrowing among leveraged Eurozone corporates during the Great Financial Crisis. Using loan-level data, we trace this increase to the twin crisis in the credit market and in funding markets. The reduction in the supply of credit by Eurozone banks caused riskier borrowers to shift to foreign banks, in particular US banks. The coincident rise in the relative cost of euro wholesale funding and the disruptions in the FX swap market caused a rise in dollar borrowing from US banks, especially for firms in export-oriented sectors. Although global bank lending is often reported to amplify the international credit cycle, we show that foreign banking acted as a shock absorber that weathered the real consequences of the credit crunch in Europe.

Suggested Citation

  • Philippe BACCHETTA & Ouarda MERROUCHE, 2015. "Countercyclical Foreign Currency Borrowing: Eurozone Firms in 2007-2009," Swiss Finance Institute Research Paper Series 15-63, Swiss Finance Institute.
  • Handle: RePEc:chf:rpseri:rp1563
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    Cited by:

    1. Hale, Galina B. & Jones, Peter C. & Spiegel, Mark M., 2020. "Home currency issuance in international bond markets," Journal of International Economics, Elsevier, vol. 122(C).

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    More about this item

    Keywords

    Money market; swaps; credit crunch; corporate debt; foreign banks;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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