Financial Crises

Abstract The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate.

This paper puts together a set of stylized facts of the corporate sector dynamics of systemic financial crises based on recent crisis episodes with a view to identifying the key issues and their policy implications. The evidence suggests that corporate crisis dynamics are triggered by a cutoff of capital inflows and are amplified into an historically severe recession by exchange rate depreciation, high interest rates, and current account adjustment. The adverse consequences of these dynamics can be forestalled and assuaged by policies that improve monitoring of the corporate sector and boost nonbank sources of corporate financing.

JEL Classification Numbers:E44, F32, G30

Keywords: Financial crises, corporate restructuring

Author"s E-Mail Address: MStone@imf·org

This paper benefited from the comments of Ales Bulir, Karl Driessen, Ed Frydl, Ferenc Karvalits, Susan Schadler, Inwon Song, Amadou Sy, Masahiko Takeda, Piero Ugolini, Lisbeth Zacho, and participants at a seminar at the Korea Institute for International Economic Policy.

Contents
I. Introduction
II. Vulnerability Phase
A. Vulnerability Buildup
B. Prevention Policies
III. Contraction Phase
A. Crisis Dynamics
The trigger
The contraction
The channels
B. Crisis Mitigation Policies
IV. Recovery Phase
A. Economic Rebound
B. Restructuring Policies
V. Conclusion
Appendix
I. Corporate Crisis Countries, Contributions to Real GDP Growth, Crisis Years Figures
1. Developing Countries, Domestic and External Credit, 1980-2000
2. Corporate Crisis Countries, Net Private Capital Flows (Excluding Reserves)
3. Corporate Crisis Countries, Relative Stock Market Indices
4. Selected Countries, Corporate Leverage, 1996
5. Corporate Crisis Countries, Industrial Production
6. Corporate Crisis Countries, Real GDP Growth and Contribution of Investment to Real GDP Growth
7. East Asia Corporate Crisis Countries, Corporate Viability Indicators, 1997-98 Text Tables
1. Selected Systemic Crisis Episodes with Important Corporate Sector Dynamics
2. Selected Countries, Gross Flows of Financial Liabilities to the Nonfmancial Corporate Sector, 1992-94
3. Crisis Episodes, Net Private Capital Flows
4. Crisis Episodes, Real Domestic Credit Before and After a Crisis
5. Crisis Episodes, Industrial Production Before and After a Crisis
6. Crisis Episodes, Real GDP and Investment Growth L5
7. Emerging Market Countries, 1998 Output Adjustment Regression Results
8. Crisis Episodes, Nominal Exchange Rate Depreciations
9. Crisis Episodes, Currency and Bank Crises
10. Corporate Crisis Countries, Current Account Balances
References