Corporate NPL portfolios in CESEE countries: how corporate leverage and debt spillovers affect firm performance

By Jože P. Damijan

Private growth and investment in most of central, eastern and south-eastern Europe (CESEE) is still hampered by persistent financial distress in the corporate sector, resulting from the excessive debt taken on before the 2008 crisis. This paper looks at how this excess leverage affects firm performance in these countries. Apart from the negative impact of a firm’s own financial distress on employment and investment, we find that the most indebted companies negatively affect other firms too, and that these effects worsen during the financial crisis and are more severe for small and medium-sized firms. Therefore, resolving the issue of corporate non-performing loans can have far more widespread benefits than previously believed, with SMEs as the main beneficiaries.