One might argue that a decline in demand for firms’ goods and services can still be a credit problem because the decline in firms’ demand is due to consumers’ reduced access to credit. We cannot rule out this possibility. Nevertheless, even if consumers face credit crunches and cut back on consumption, from the firms’ perspective, it is a demand shock. Examining whether consumers actually face credit crunches is an interesting question by itself, but is beyond the scope of this paper. In fact, studies on firms in general will not be able to say much about consumers’ credit situations. One has to rely on household data<sup>3</sup> . Another argument is that what we observe can be attributed to credit shocks to a few firms. For example, credit crunches to a few large firms, especially those that consume intermediate inputs, can squeeze demand and cause negative demand shocks for many smaller suppliers. While this is a legitimate concern, we do not think this is likely for the following reason: the data indicate that a vast majority of firms of all sizes and sectors robustly points to demand as the main cause of their worsening performance (see Table A2 in the Appendix), which runs counter to the argument that large firms are more prone to credit crunches and less to demand shocks.

# **2 Data**

The data are from the World Bank’s Financial Crisis Survey. The World Bank’s Enterprise Survey Unit conducted three waves of firm surveys in six Eastern Europe countries: Romania, Bulgaria, Hungary, Lithuania, Latvia, and Turkey. These countries are among those that were hit hardest by the crisis. The three waves of survey were conducted in June-July 2009; April 2010 and August 2010. There are 1,686 firms in six countries: 514 firms in Turkey, 370 firms in Romania, 187 firms in Hungary, 226 in Latvia, 239 in Lithuania and 150 in Bulgaria. The Financial Crisis Survey is based on the baseline Business Environment and Enterprise Performance Survey (BEEPS) conducted in 2008, and released in 2009. The Financial Crisis Survey basically covers the same firms in the BEEPS, with some exceptions.<sup>4</sup> The three waves of the Financial Crisis survey ask several questions about firms’ employment, sales, and financial conditions, as well as expectations about future sales and labor decisions, but do not ask questions about firms’ capital. The three waves can also be linked to a previous BEEPS survey that was

> 3 Studies on the U.S. have shown that house price declines and high debt before the crisis explain a large part the decline in households’ consumption in the crisis (e.g. Mian, Rao and Sufi 2011). However it is difficult to tell to what extent the consumption decline is due to a negative wealth shock, or to higher precautionary motives, or to credit crunches.

> 4 Exceptions are firms that moved, discontinued business or filed for bankruptcy, or could not be contacted (e.g., telephone lines were out of order). In the first wave, the number of firms that discontinued business or filed for bankruptcy is relatively small (26 firms total for 6 countries). In addition, for Turkey, due to the constraints of financial resources, only manufacturing firms are covered in the first wave.

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