Discussion Paper Details

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Title: Countercyclical Foreign Currency Borrowing: Eurozone Firms in 2007-2009

Author(s): Philippe Bacchetta and Ouarda Merrouche

Publication Date: November 2015

Keyword(s): corporate debt, credit crunch, foreign banks and money market

Programme Area(s): Financial Economics

Abstract: Despite international financial disintegration, we document a dramatic increase in dollar borrowing among leveraged Eurozone corporates during the Great Financial Crisis. Using loan-level data, we trace this increase to the twin crisis in the credit market and in funding markets. The reduction in the supply of credit by Eurozone banks caused riskier borrowers to shift to foreign banks, in particular US banks. The coincident rise in the relative cost of euro wholesale funding and the disruptions in the FX swap market caused a rise in dollar borrowing from US banks, especially for firms in export-oriented sectors. Although global bank lending is often reported to amplify the international credit cycle, we show that foreign banking acted as a shock absorber that weathered the real consequences of the credit crunch in Europe.

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Bibliographic Reference

Bacchetta, P and Merrouche, O. 2015. 'Countercyclical Foreign Currency Borrowing: Eurozone Firms in 2007-2009'. London, Centre for Economic Policy Research.