Fiscal Policy Effects on Non-Performing Loan Formation

Does Fiscal Consolidation Affect Non-Performing Loans? Global Evidence from Heavily Indebted Countries (HICs)

“…To the best of our knowledge, we could not find any paper on the linkage between fiscal policy and NPLs other than that of Siakoulis (2017). Using a global dataset from 31 countries, Siakoulis reported that fiscal pressure, as measured by the changes in the cyclical adjusted primary balance, determines the NPLs.…”

“…Initially, banks heavily exposed to United States residential mortgage-backed securities saw a decline in asset quality. Subsequently, the GFC evolved into a sovereign debt crisis in the Eurozone, further straining the debt-serving capacity of businesses and households, especially in highly indebted countries (HICs) 1 (Louzis et al 2012;Siakoulis 2017). Notably, Ireland witnessed a significant 24.82 percentage point increase in NPLs from 2003 to 2013, while Ukraine experienced a surge of 51.54 percentage points in NPLs from 2007 to 2017, mirroring the trend seen in other highly indebted economies.…”

“…There is a wide range of research on the macroeconomic determinants of NPLs (Alizadeh Janvisloo and Muhammad (2013), Beck et al (2013), Dimitrios et al (2016), Fallanca et al (2021), Fofack (2005), Makri et al (2014), Messai and Jouini (2013), Roland et al (2013), Zheng et al (2019), Kartal et al (2021), Konstantakis et al (2016), Thornton and Di Tommaso (2020), Tanasković and Jandrić (2015), Vithessonthi (2016), Le et al (2020), Boumparis et al (2019), and Jiang et al (2018)). While there is existing research on the macroeconomic determinants of NPLs, evidence is scarce regarding the fiscal determinants, with limited empirical studies, such as that of Siakoulis (2017), focusing solely on the Eurozone and using the cyclical adjusted primary balance as a measure of the fiscal stance. This study aims to fill this gap by providing empirical evidence on the impact of fiscal consolidation on NPLs in highly indebted countries, making significant contributions to the current literature.…”

“…The existing literature employs various measures to analyse fiscal policy effects. For instance, Siakoulis (2017) utilised the cyclical adjusted primary balance, which represents the budget balance under normal economic activity levels. A positive change in this indicator indicates an increased tax burden, adversely affecting the debt-servicing capacity of businesses and households.…”

“…The existing literature (Beck et al (2013), Dimitrios et al (2016), Fallanca et al (2021, Kjosevski and Petkovski (2021), Louzis et al (2012), Makri et al (2014), Messai and Jouini (2013), Roland et al (2013), Siakoulis (2017), Vogiazas andNikolaidou (2011), andZheng et al (2019)) has identified a wide range of determinants of the NPLs. Following this strand of research, this study uses economic growth and unemployment to capture the effect of the economic cycle.…”