M-RCBG Associate Working Paper No. 60

Credit Crisis 3.0? An Assessment of the Macroeconomic Risk of Corporate Debt

Anchisa Pongmanavuth



Corporate debt in emerging markets has quadrupled over the last ten years, leading to worries that there may be an impending corporate debt crisis. Since few studies have directly examined the macroeconomic risk of corporate debt, the possibility of a third wave credit crisis, following the US subprime mortgage and Eurozone sovereign debt collapse, is open to much speculation. My research fills this missing piece in the literature by empirically testing the effect of corporate debt on economic crisis on a time-series, cross-country basis using a recent IMF dataset and both panel regression and instrumental variable analysis. I find evidence that corporate debt can lead to a crisis, especially when it surges rapidly or is exposed to global economic fluctuations. The risk is broadly similar between advanced and emerging economies and is most likely to cause a shock in the banking system, although corporate debt may additionally lead to a currency crisis in emerging economies. Corporate debt plays a considerable role in the ongoing emerging market volatility as countries with larger corporate debt accumulation following the 2007-2008 financial crisis witness greater capital withdrawal and financial market declines. Although corporate debt is a useful financial tool for economic growth, it also poses significant macroeconomic risk and thus should be maintained at a sustainable level.

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