INTRODUCTION Corporate sector dynamics have moved to the center stage of systemic financial crises in recent years. The most dramatic example is the East Asia crisis, which is being increasingly attributed to corporate balance sheet problems (Krugman, 1999b). This new leading role for corporate crisis dynamics is posing novel and difficult challenges to policymakers. For example, corporate balance sheets weakened by crisis limited the ability of central banks to stabilize exchange rates in East Asia during 1998 (cf. Roubini, et al., 1998). Another important policy challenge is large scale post crisis corporate restructuring, which is always more complex and prolonged than expected, and seems to be a regular feature of recent systemic crises (Stone, 2000).
The novelty and difficulty of these policy challenges suggest that the corporate sector warrants special attention in the consideration of systemic financial crises. A systemic crisis can be defined generally as "a severe disruption to financial markets that by impairing their ability to function has large and adverse effects on the real sector" (IMF, 1998). Systemic crises have been seen as driven by mutually reinforcing disruptions to exchange rate and bank markets (cf. Kaminsky and Reinhart, 1999; IMF, 1998; Mishkin, 1997), and, therefore, the corporate sector has received very little attention. Recently, however, high levels of short term and unhedged corporate borrowing from domestic banks and volatile international capital markets have boosted the importance of corporate dynamics in systemic crises.
Corporate sector crisis dynamics, according to the evidence presented below, are marked by:
(I) a high level of corporate sector leverage;
(II) an historically severe investment led recession;
(III) strong corporate sector balance sheet policy channels; and,
(IV) large scale corporate sector restructuring led by the government.
This paper is based on the premise that a better understanding of corporate crisis sector dynamics could help policymakers prevent and mitigate systemic financial crises. To this end, a set of stylized facts on corporate sector dynamics in systemic crises is put together in this paper with a view to identifying the key issues and their policy implications. The remarkable shortfall of data for the corporate sectors of countries prone to systemic crises precludes undertaking of the more ambitious and much needed task of developing a broad analytical framework founded on theory and empirics. This paper, rather, assembles data from a variety of sources to construct stylized facts that could be used to Nonsystemic financial crises are limited to the financial (usually banking) sector itself (e.g., the U.S. savings and loan crisis in the 1980s) or to currency markets (the ERM crisis of 1992-93) and need not give rise to corporate sector crisis dynamics formulate such a framework. In addition, these facts may serve to inform ongoing policy decision making on corporate crisis issues.
Two main policy messages emerge from this paper. First, improved reporting of corporate sector data could forestall and assuage systemic crises. The dearth of reliable corporate data for countries that are prone to crisis makes it difficult or impossible to identify corporate sector vulnerability, limits the effectiveness of policy once crisis hits, and slows corporate restructuring thereafter. Corporate sector data collection and reporting should be accelerated, and the tools used to analyze these data refined. Second, policies that increase nonbank sources of corporate financing such as equity, commercial paper and bond markets can reduce crisis vulnerability and severity. These markets can be developed by enhancing financial infrastructure through policies directed at accounting standards, judicial and legal systems, and other institutional nuts and bolts. This paper also offers some recommendations concerning crisis prevention, policy responses during a crisis, and the modalities of corporate restructuring.
Historically, the linkages between corporate sector leverage and the macroeconomy were relatively weak, and most of the literature has addressed non crisis issues. Fisher (1933) used a buildup of corporate debt as a key ingredient in his explanation of business cycles. More recently, the "financial accelerator" literature has shown how highly indebted corporations can amplify the impact of changes in interest rates (Bernanke et al., 1998). The role of corporate sector balance sheet crisis dynamics in an open economy context have been modeled in several normative analyses of the Asian crisis (Natalucci, 1999 and Krugman, 1999b). The relatively few empirical cross country analyses which have addressed the role of the corporate sector in systemic financial crises have mainly concerned the transition countries (World Bank, 1996) and East Asia (Lane et al., 1999 and World Bank, 1999).