TITLE:
Government Involvement in Corporate Debt Restructuring: Case Studies from the Great Recession
AUTHORS:
David A. Grigorian, Faezeh Raei
KEYWORDS:
Corporate Debt Restructuring; Contingent Liabilities; Quasi-Sovereign Risk
JOURNAL NAME:
Modern Economy,
Vol.4 No.3,
March
27,
2013
ABSTRACT:
The paper examines recent episodes of government involvement in corporate debt restructurings. It argues that corporate debt restructuring is an important step toward recovery from a financial crisis. Due to interlinkages between the balance sheets of corporations and the financial sector, without an effective corporate debt restructuring, bank lending is likely to remain constrained. We then discuss the rationale for, and modalities of, the state intervention in corporate debt workouts through reviewing six countries with large scale corporate debt workouts. Case studies reveal that the costs of corporate sector rescue are significant and in several cases on par with the costs of financial sector support. The paper sheds light on the importance of contingent liabilities and associated risks to government balance sheet from the corporate debt side and draws conclusions that point to the need for improved surveillance and governance going forward.