Our study builds on an intuitive idea: to recover its past investment, a lender has incentives to offer more favorable lending terms to a firm close to default to keep the firm alive. In contrast to standard intuition, we find that evergreening allows a firm with worse fundamentals—less productive and with more debt—to borrow at relatively better terms. Based on detailed U.S. loan-level data for the years 2014-19, we provide empirical support for our theory at a time when the banks were relatively well capitalized and the economy was growing steadily. Using a dynamic model of the U.S. economy, we find that evergreening has material effects on the performance of the overall economy, resulting in lower borrowing rates, higher levels of debt, and depressed overall productivity.
- Date Posted:
- November 27, 2023
[In the official reports] both the goods surplus, which is much smaller in the balance of payments than in the customs data, and balance on investment income, which remains in deficit even with the rise in U.S. interest rates, are suspicious. With reasonable adjustments, China's “true” current account surplus might be $300 billion larger than China officially reports. That's real money, even for China. The model implies China's overall income balance should now be back in a surplus of around $70 billion thanks to the rise in U.S. short-term interest rates. So without the unexplained deficit in investment income and the discrepancy between customs goods and balance of payments goods, and China’s current account surplus would now be around $800 billion, over 4 percent of its GDP.