اهرم شرکتها و بحران ارز

Currency crises can arise because it is optimal to bail out financially distressed exporting firms through a currency depreciation. Exporting firms will not undertake profitable investments when high leverage causes debt overhang problems. A currency depreciation increases the profitability of new investments when revenues are foreign-currency denominated and domestic-currency costs are nominally rigid. Ex ante, currency depreciation leads to excessive investment in risky projects even if safer, more valuable projects are available. However, currency depreciation is optimal ex ante if the risky projects have higher expected returns and if firms must rely on debt financing because of underdeveloped equity markets.

Currency crises have been a frequent phenomenon in recent years. During the past decade, there have been major crises in Europe (the crisis of the Exchange Rate Mechanism), in Latin America (the Tequila crisis), and most recently in Asia. Moreover, these crises are difficult to abscribe solely to incompetent macroeconomic policies. In particular, the Asian currency crisis in 1997–1998 was unexpected and its magnitude a shock. By conventional fiscal measures, the governments of the afflicted countries were not in bad shape at all at the beginning of 1997. Only a couple of years earlier, the very same countries were held as good examples of prudent macroeconomic management by the World Bank. Their budget deficits were not excessive even though the growth of these economies had slowed somewhat during 1996. Current account deficits were large in some countries (Thailand and Malaysia), but in others (Korea and Indonesia) they were very modest. Indeed, Krugman (1999) concludes that there was not a strong case to be made for currency depreciations for macroeconomic reasons. Radelet and Sachs (1998) go even further and blame the magnitude of the crisis on financial panic in the currency markets, aggravated by bad advice from the IMF. This paper provides a view of currency crises, based on excessive indebtedness and low profitability in the corporate sector, that is applicable to the Asian crisis as well as to some extent to the earlier European and Latin American crises. The argument proposed in this paper is that restoring investment incentives in financially distressed exporting firms through a currency depreciation is optimal ex post for an economy. In our model, the economy consists of profit-maximizing exporting firms, whose products are sold in the world markets. These firms can choose either safe or risky business strategies that can be financed either with debt or equity. If the firms choose the risky strategies, they can attain very high profits with some probability . If the chosen strategies fail, the exporting firms can partially recover their losses by investing in profitable new business opportunities. If the firms have been financed with debt, however, they will not undertake the new investments because of debt overhang problems, i.e., because the new investments would only benefit the creditors. The government would like the new investments to take place, because they would increase the amount of real income for the economy, net of opportunity costs. In our model, the domestic currency is initially pegged to the foreign one. The government can make investments feasible by not defending the currency and thus letting it float. The resulting equilibrium currency depreciation will increase the profitability of new investments when revenues from the new investments are denominated in a foreign currency and when costs denominated in the domestic currency are sticky. If the exporting firms have been financed with equity, the new investment opportunities are feasible and the investments will always take place, and hence there is no need for currency depreciation. However, exporting firms in this model have an incentive to finance their risky projects with debt instead of equity, even if equity financing is readily available, thus forcing a currency depreciation. Moreover, there is no need for a depreciation if the amount of debt can be renegotiated privately between firms and their creditors, but firms prefer currency depreciation to debt renegotiation because with nominal rigidities in investment costs, the resulting losses from a depreciation are borne by the suppliers of those investments. With private debt renegotiations, the costs are ultimately borne by the firms themselves. Thus, exporting firms have an incentive to precommit not to renegotiate debt levels. Currency depreciations can be optimal insurance schemes ex ante if the risky investments have a higher expected value than the safe ones and if firms are forced to rely on debt financing. Without currency depreciations, equity-constrained firms might have to choose the less profitable safe strategies because of the unavoidable debt overhang problems in risky projects. Although currency depreciations in this context are always optimal ex post, they can be harmful ex ante when the safe projects are the more valuable ones. Exporting firms know that the government will not defend the exchange rate if their risky investments have failed, provided that the investments have been financed with debt and there are no debt renegotiations between exporters and their creditors. High leverage without renegotiation leads to a situation in which the exporting companies capture the upside of the investment, but do not suffer from the downside. Therefore, firms make excessive investments in risky projects at the expense of more valuable safe projects. Moreover, if firms cannot be financed by equity because equity markets are underdeveloped, the extent of the inefficiency could increase. The owners now prefer to engage in risky investments and finance them with debt to a greater extent than with equity financing, because the owners are unable to commit to take the more profitable safer projects even if that would be in their best interest. Equity is the only financing source that provides the owners with the right incentives. Finally, if exporting firms’ old debt is denominated in a foreign currency, a larger depreciation is needed to restore incentives to invest. So, somewhat surprisingly, foreign debt only exacerbates the problem. The government would like to commit not to let the currency depreciate, if the safe business strategies are more valuable for the economy as a whole. However, financial markets and exporting firms know that the government will rescue the exporting firms by letting the currency float if need be. Hence the government's wishes to maintain the fixed exchange rate are not credible. Why did Asia experience a currency crisis? According to our model, the answer is that the countries afflicted were export-oriented countries dominated by large firms with extremely high leverage and low profitability. The recent capital market liberalizations in these countries had resulted in increased foreign-currency borrowing, thus further increasing leverage above already high levels. Moreover, depression in Japan, a strong dollar and a real depreciation of Chinese yuan had severely reduced the profitability of exporting companies. We argue that in the absence of debt renegotiation, the only way out of this debt overhang problem was a currency depreciation.1 The rest of this paper is organized as follows. Section 2 reviews the related literature. In Section 3 we present the basic framework, in Section 4 we discuss the debt–equity choice when currency depreciations are possible, and in Section 5 we extend the model in several directions. The empirical implications that arise from the model are analyzed in Section 6. Section 7 concludes the paper. All proofs are in the Appendix.

The countries that have recently experienced currency depreciations have been export-oriented with large exporting firms. This paper provides a framework to analyze the reasons for currency depreciations for such countries. The argument is based on depreciations being optimal ex post for the economies in question. After experiencing negative shocks, exporting firms have valuable investment opportunities, but they will not invest because of high debt levels. The government can solve these debt overhang problems and make investments feasible, since depreciation of the currency increases the profitability of new investments when revenues are in a foreign currency, and when the costs of the new investment denominated in the domestic currency are sticky. Firms prefer depreciations to private renegotiations of debt, because in depreciations the costs are passed on to other parties. Hence firms have an incentive to commit not to renegotiate their debt levels. Although currency depreciations are optimal ex post, they can have adverse consequences ex ante for economies. Exporting firms know that the government will let the currency depreciate if their risky investments fail, provided that the investments have been financed with debt. This leads to high leverage and excessive investment in risky projects at the expense of more valuable and safer projects financed with equity. Knowing this, the government would like to commit not to let the currency depreciate, whenever the costs of a depreciation to the society are greater than the private gains of a depreciation to the exporting firms. We show that the severity of such an inefficiency increases when equity markets are underdeveloped, and when firms borrow abroad. When equity markets are underdeveloped, debt is the only financing source available, and risky investments become preferable from the firm owners’ point of view. Foreign borrowing by exporting firms exacerbates the problem, too. If firms’ existing debt is denominated in a foreign currency, a larger depreciation is needed to restore incentives to invest. Moreover, when foreign credit is available, firms prefer that to domestic credit. Letting the currency depreciate is also optimal ex ante if risky projects are socially preferred to safe projects, and if the equity markets are underdeveloped and private renegotiations between borrowers and lenders are costly. With underdeveloped equity markets, firms are forced to rely on debt financing. This leads to involuntary debt overhang problems that can be avoided by letting the currency depreciate. Excessive reliance on debt financing could imply that either exporting firms are gambling at the expense of others or that they are severely equity rationed. Thus, for emerging markets, a permanently fixed exchange rate coupled with underdeveloped equity markets would be a dangerous combination in the absence of debt renegotiations. It is then of utmost importance for emerging markets to try to improve the functioning of equity markets through changes in corporate governance and minority shareholder protection. Equally important for emerging markets would be efficient bankruptcy procedures that would allow the renegotiation of debt levels. Some authors argue (see Giavazzi and Pagano, 1988) that a system like the European Monetary System increases the credibility of governments’ policies toward achieving price stability. However, the increased costs of depreciations have not been enough to deter governments from letting their currencies depreciate: the incentives to devalue can be very strong indeed. In our framework, it is not surprising that fixed exchange rate regimes have proved to be so untenable, especially coupled with free capital mobility. If governments of small exporting countries really want to commit not to devalue, then the credible solutions are either to adopt a common currency like the Euro or to completely dollarize the economy. It has been argued that adopting a common currency can be dangerous because of asymmetric shocks. According to our model, it is because of such shocks that a small country should adopt a common currency. As in all moral hazard problems, providing insurance (through depreciations in our model) increases the need for insurance. The firms’ investment strategies are not exogenous. When depreciations are impossible, there will be less need for depreciations.