External Balance Sheets as Countercyclical Crisis Buffers

Joseph P. Joyce
2018 Social Science Research Network  
The external balance sheets of many emerging market countries are distinguished by their holdings of assets primarily in the form of foreign debt and foreign exchange reserves, while their liabilities are predominantly equity, either FDI or portfolio. In this paper we investigate the claim that this composition served as a buffer for the emerging markets during the global financial crisis of 2008-09. We use data from a sample of 67 emerging market and advanced economies, and several indicators
more » ... several indicators of the crisis are utilized: GDP growth rates in 2008-09, the occurrence of bank crises and the use of IMF credit. Our results show that those countries that issued FDI liabilities had higher growth rates, fewer bank crises and were less likely to borrow from the IMF. FDI assets, on the other hand, were linked to steeper contractions in GDP and more participation in IMF programs. Portfolio assets and liabilities had similar impacts, but their coefficients were less significant. Countries with debt liabilities, on the other hand, had more bank crises and were more likely to use IMF credit. We conclude that the "long debt, short equity" strategy of emerging markets did mitigate the effects of the global financial crisis.
doi:10.2139/ssrn.3155286 fatcat:7ruoggvd75g77j2cv3ae4dftle