Inertial Credit and Opportunistic Arrears in Transition

The paper explores a model of the intertemporal process of financial stabilization in a transition economy. We derive an empirical measure to assess whether the banking sector acts as a source of financial discipline, or as a short-term buffer for enterprise losses. Specifically, in the presence of active bank monitoring the correlation between bank lending and arrears should be decreasing over time, while it would increase if banks rolled over bad loans in the expectation of a bailout. We run the test on balance sheet data from a sample of Romanian state-owned enterprises over 1991-1994. We find evidence that financial discipline has not improved in this time period, and that soft bank financing seems to have substituted for centralized clearing of trade arrears as a source of soft budget constraint for the worse Romanian firms