Countercyclical Foreign Currency Borrowing: Eurozone Firms in 2007-2009

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Using syndicated loan-level data we document and explain the causes and implications of a new and surprising stylized fact. In the midst of the financial crisis, dollar borrowing by leveraged Eurozone corporates rose dramatically relative to their euro borrowing. We show that this resulted from a shift from domestic to foreign, mainly US, banks. This was combined with an increase in the proportion of dollar lending by foreign banks, explained by a rise in the relative cost of euro wholesale funding and the disruptions in the FX swap market. Foreign banking thus acted as a shock absorber during the 2007-2009 credit crunch in Europe.

Author(s):

Ouarda Merrouche    
Université Paris-Nanterre
France