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Private sector share of external debt and financial stability: Evidence from bank loans

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  • Hallak, Issam

Abstract

In the last two decades, the private sector has contracted a substantially larger share in the total amount of foreign-currency international debt (private sector share of external debt), especially in developing countries. In this paper, I empirically examine the effect of this phenomenon on bank loan prices. I find that the private sector share of external debt negatively and significantly impacts the price of bank loans. This result supports the hypothesis that private sector debt contributes to international financial stability to a greater degree than sovereign debt. Nevertheless, this impact is canceled out in the presence of fixed exchange regimes that are unsuitable with respect to fundamentals. In such circumstances, the private sector may take advantage of capital market distortions that are maintained by official authorities and thus exposes the country to further financial instability. Additional results corroborate the observation that the gain in financial stability stems from more efficient use of funds and reduced monitoring costs.

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  • Hallak, Issam, 2013. "Private sector share of external debt and financial stability: Evidence from bank loans," Journal of International Money and Finance, Elsevier, vol. 32(C), pages 17-41.
    • Handle: RePEc:eee:jimfin:v:32:y:2013:i:c:p:17-41
    DOI: 10.1016/j.jimonfin.2012.02.017
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    6. Sun, Yunpeng & Lu, Zhou & Bao, Qun & Li, Ying & Li, Haoning, 2022. "The Belt & Road Initiative and the public and private debts of participating countries: The role of China's economic policy uncertainty," Structural Change and Economic Dynamics, Elsevier, vol. 60(C), pages 179-193.
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    More about this item

    Keywords

    International debt crisis; Private sector debt; Sovereign debt; Financial stability; Bank loan;
    All these keywords.

    JEL classification:

    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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