DP333 Business Debt and Default in France
On the basis of quarterly data in 1977-87 and the use of the Engle-Granger method of co-integration, we find that real and financial factors, insolvency and illiquidity, are all important, separate influences on the defaults of French firms. We capture the effect of illiquidity by constructing stationary series to represent both cyclical departures of output from normal levels and deviations of financial prices from 'fundamentals'. We reflect the impact of financial factors by using debt-output ratios and real interest rates. These last two variables emerge as influences on business defaults in the long run and the short run, which we interpret to mean that business indebtedness affects both solvency and liquidity. Real wages and the terms of trade appear to affect solvency alone.