Sovereign debt and corporate capital structure: The evidence from selected European countries during the Gglobal Financial and Economic Crisis

Abstract. The recent Global financial crisis and the following European debt crisis show the significance of country financial stability and its impact on the private sector. Moreover, the sovereign debt as an essential element of government macroeconomic policy influences the financial performances of the companies and their future development and growth. The capital structure and financing decisions represent one of the most significant parts of company's financial policy and its key to financial strength. There are a lot of external factors influencing the capital structure; however, due to the European debt crisis the aim of this study is to indicate the influence of sovereign debt on capital structure of the private held companies in different European countries. This study examines the evidence from European developed countries and emerging markets for the period 2005-2012, in order to compare the level of its impact on the capital structure according to the countries' specifics. We find that after Global Financial Crisis the sovereign debt has tendency to increase in all investigated countries. Greece and Italy have the highest level of debt and it exceeds their Gross Domestic Product (GDP). In addition to that, the Czech Republic has the lowest level of sovereign debt to GDP, but at the same time the corporate capital structure exceeds 100%. The sovereign debt levels are strongly and statistically significantly correlated with each other, however, Hungarian debt has weaker relation with other countries. The findings also show the integration and interdependence of European countries. Moreover, Hungarian, Czech and German private sectors are the most depended on the level of sovereign debt. Keywords: sovereign debt, capital structure, European debt crisis, short-term debt, long-term debt. JEL Classification: G32, H63. Introduction In the past few years the sovereign credit risk has increased both in advanced and emerging markets due to higher deficits and debt levels and weaker economic growth. The interaction between public and corporate finance has become more apparent and significant, notably after the Global Financial Crisis and debt crisis in Europe. The presence of effective government debt market encourages development of efficient financial markets, which are getting more and more interconnected within the process of globalization (Pietrzak et al. 2017, Peker et al. 2014, Kulisauskas and Galiniene 2015, Meluzin and Zinecker 2016, Balcerzak and Pietrzak 2016, Faldzinski et al. 2016), and are essential for ensuring a stable economic growth (Das et al. 2010). Moreover, efficient financial markets provide long-term and short-term external financing for companies. In this paper we investigate the relation between sovereign debt and corporate capital structure across different countries, which represent developed and emerging economies of the European Union (EU). According to the International Monetary Fund classification Hungary, Poland and downgraded Greece have emerging economies; and the Czech Republic, Slovakia, Germany, France and Italy represent developed countries. Provided selection of certain countries enables us to have comparison analysis from the different angles. For instance, the Czech Republic, Slovakia, Hungary and Poland are the members of the Vysegrad group; the economies of Italy and Greece were badly hit by the Global Financial Crisis; France and Germany represent advanced economies. There are less financial constrains in the developed countries both on macro level as debt management and micro level as corporate financing choice. However, the sharp increase of sovereign debt level in many economies since 2008 has changed the situation. The problems on the government bond market, for example, a fall in bond prices, can lead to liquidity problems or even solvency problems, and in turn the rise in liquidity or solvency risks leads to higher level of refinancing risk. …