Page 327 - Special Topic Session (STS) - Volume 1

STS441 Burcu Zühal İ.E. et al.
The systemic concerns about the bankruptcy of several large financial firms
in the U.S. forced FED to enact expansionary monetary policy in the upcoming
years of the crisis and other developed countries followed counterpart policies
as their economic situation was very much alike. The quantitative easing policy
worked in two transmission channels. First channel is direct and it involves a
central bank buying up long-term public and private debt in massive amounts
resulting in increasing money supply. (BIS, 2014; IMF, 2015) Since the start of
the crisis, the four central banks of the United States, the United Kingdom, the
Euro zone, and Japan have injected trillions of liquidity into their economies,
pushing interest rates to very low levels. The second channel is semi direct; the
decline in bond market yields resulting from central bank bond purchasing,
lowers the costs of financing and triggers demand. As a result, lower policy
rates and expansion in central bank balance sheets in the advanced economies
created excess liquidity for emerging markets (Shin 2013). This has eased
financing conditions and provided FX borrowing opportunities for emerging
market companies. Lower interest rates of FX loans and moderate exchange
rate levels increased their foreign currency borrowing. Aggregate foreign
currency liabilities in the balance sheets of nonfinancial companies have
therefore risen sharply since 2010.
In December 2013, FED announcement for tapering off its asset purchases
from January 2014 had a massive effect on markets. Tapering was on a
progressive basis and the asset purchase program was concluded in October
2014. In October 2017, the FED took a crucial step by initiating the process to
reduce its balance sheet. This policy was implemented by reducing FED’s
reinvestment of payments made by issuers of securities it holds. The ECB
continued its purchasing program in 2016 and started going for a
normalization of its balance sheet in 2017.
The decisions to end quantitative easing constituted a challenge for
emerging markets as they had significant vulnerabilities arising from currency
mismatches in the balance sheets of NFCs that may aggravate market
volatility. Waves in international capital flows deteriorate the exchange rate
exposure of nonfinancial companies through exchange rate depreciations,
leverage decisions and corporate financial distress. The studies in the literature
point out the fact that firm size is related to corporate distress and, further,
that currency depreciations amplify the impact of leverage on financial
vulnerability for large firms during a crisis. There is also a granularity effect in
that large firms are systemically important (Gabaix, 2011). Relatedly there is
evidence that the sales growth of large firms with higher leverage is more
adversely impacted by exchange rate shocks (Alfaro et.al. 2017). Hence, the
empirical studies proves the importance of micro level analysis in order to see
the big picture.

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