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Fiscal Consolidation and the Cost of Credit; Evidence from Syndicated Loans

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  • Senay Agca
  • Deniz O 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.

Suggested Citation

  • Senay Agca & Deniz O Igan, 2013. "Fiscal Consolidation and the Cost of Credit; Evidence from Syndicated Loans," IMF Working Papers 13/36, International Monetary Fund.
  • Handle: RePEc:imf:imfwpa:13/36
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    Cited by:

    1. Klein, Mathias, 2016. "Austerity and private debt," Ruhr Economic Papers 642, RWI - Leibniz-Institut für Wirtschaftsforschung, Ruhr-University Bochum, TU Dortmund University, University of Duisburg-Essen.
    2. Mathias Klein, 2016. "Austerity and Private Debt," Discussion Papers of DIW Berlin 1611, DIW Berlin, German Institute for Economic Research.

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