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We examine how the cost of corporate credit varies around fiscal consolidations aimed at reducing government debt. Using a new dataset on fiscal consolidations and syndicated corporate loan data, we find that loan spreads increase with fiscal consolidations, especially for small firms, domestic firms, and for firms with limited alternative financing sources. These adverse effects are mitigated substantially if consolidations are large, and can be avoided if consolidations are also accompanied with more adaptable macroeconomic policies and implemented by a stable government. These findings suggest that lenders price the short-term recessionary effects in loans but large consolidations can reduce or undo the increase in spreads, especially under favorable country conditions, by signaling credibility and creating expansionary expectations.

Debts, External. --- Debts, External --- Syndicated loans. --- Participating loans --- Loans --- Debts, Foreign --- Debts, International --- External debts --- Foreign debts --- International debts --- Debt --- International finance --- Investments, Foreign --- Syndicated loans --- E-books --- Macroeconomics --- Money and Monetary Policy --- Public Finance --- Industries: Financial Services --- Fiscal Policy --- Financing Policy --- Financial Risk and Risk Management --- Capital and Ownership Structure --- Value of Firms --- Goodwill --- Fiscal Policies and Behavior of Economic Agents: Firm --- National Budget, Deficit, and Debt: General --- Banks --- Depository Institutions --- Micro Finance Institutions --- Mortgages --- Debt Management --- Sovereign Debt --- Monetary Policy, Central Banking, and the Supply of Money and Credit: General --- Finance --- Public finance & taxation --- Monetary economics --- Fiscal consolidation --- Public debt --- Credit --- Fiscal policy --- Financial institutions --- Money --- Debts, Public --- Italy

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We study how credit market deregulation and increased international financial openness have changed corporate borrowing. The evidence comes from a large panel of publicly traded firms in 38 countries over the period 1994-2002. Reforms are measured with a comprehensive new index that tracks six separate dimensions. We find that these transformations have increased leverage and lengthened debt maturity in advanced economies, as expected, suggesting that in these countries corporate credit markets have become deeper. In emerging economies, the picture is more mixed: more international openness has led to more leverage but shorter debt maturity. Financial sector reforms have reduced leverage, while their effects on debt maturity have differed depending on the type of reform. Importantly, the differential impact of openness and reforms on the leverage and debt maturity of firms in advanced and emerging market countries also emerges when we distinguish between firms that are potentially financially constrained and firms that are not. These findings suggest that in emerging economies fundamental institutional weaknesses make it difficult to secure the benefits of international financial openness and domestic financial reforms.

Banks and Banking --- Finance: General --- Investments: Bonds --- Money and Monetary Policy --- General Financial Markets: General (includes Measurement and Data) --- Banks --- Depository Institutions --- Micro Finance Institutions --- Mortgages --- Monetary Policy, Central Banking, and the Supply of Money and Credit: General --- Finance --- Banking --- Investment & securities --- Monetary economics --- Securities markets --- Bond ratings --- Credit --- Emerging and frontier financial markets --- Capital market --- Banks and banking --- Bonds --- Financial services industry --- United States --- Corporations --- International finance. --- Corporate debt. --- Finance.