Consideration of corporate indebtedness is a decisive factor in the willingness to reform the financial system. This was reinforced in the international economic context by the restrictions resulting from membership of the European Monetary System.

Respect for a stable currency parity among EMS member countries and the obligation to keep the franc at a fluctuation margin of plus or minus 2.25% constituted a strong constraint for economic policy.

However, it was the financial system of the debt economy, in which banks finance an expected product at current prices. This was perceived as a factor, if not a cause of inflation, at least supporting it.

The introduction of the EMS has contributed to the imposition of an international benchmark for monetary policy. For its promoters, the opening of markets should replace debt economy practices with reference to international rates. It was also expected to reduce the cost of financial intermediation.

The second half of the decade was marked by a sharp fall in inflation. The strong franc policy achieved its goals.

Nominal interest rates approached real interest rates. The leverage effect of debt turned into a knock-on effect and drove many companies into bankruptcy.

The most significant impact of this transformation on the economy is an important macroeconomic impact that continues to this day.

The distribution of value added between wages and profits has changed. In other words, the relative shares of capital and labor in the distribution of the income produced have developed against the labor factor.

The gradual increase in the margin ratios of the firms enabled them to invest more when the demand expectations were positive.

When foreign exchange controls ended, companies’ resources enabled them to finance their investments, signaling the end of the debt economy.

Transition to a Financial Market Economy

A significant change in the financial behavior of companies, two aspects of their financial situation, have changed a lot.

Encouraging the transition from a debt economy to an equity economy means that corporate finance is very strongly based on bank credit.

Economic authorities want to substitute financing mainly provided by the savings of companies and supported especially for development investments. Therefore, capital economy predicted above all an increase in corporate savings.

This implied that two conditions were met:

• Increase in their profits and therefore their share in the sharing of added value,
• Reduction of financial expenses, ie debt repayment burden and interest charges.

The margin ratio (the ratio of gross operating surplus to value added in terms of national compliance) is a good indicator of the share of value added.

This ratio increased from 23.3% to 25.5% and 31.4%. Then it stayed above 30%. Corporate savings rate increased from 11.2% to 18.2%.

This level of savings allowed equity to increase. We can understand its formation from the evolution of the rate of self-financing, which rose from 79.6% to 93.1% and reached 105%.

Self-financing rates, which were close to 60% in previous decades, have thus been permanently replaced by rates above 90%.

Capital formation by corporations responded well to the reformers’ expectations. Especially in banks, in other words, the credit component of the financial structure of companies was strongly reinforced by lowering leverage.

The absence of corporate leverage can be judged by changes in the debt-to-equity ratio. This slight delay in debt reduction compared to an increase in savings is explained by the rise in corporate indebtedness after quantity restrictions on credit are lifted.

The decrease in the debt/equity ratio, which was the basis of the decline in the unpaid loans of the bank balance sheets, did not occur in the following years.

Two interpretations of this evolution can be made. The first is to explain the lack of leverage by the increase in real financial expenses, ie adjusted for inflation.

The real long-term interest rate, which averaged 0.8%, was almost zero and then rose with great volatility to 4.5%.

The discontinuation of companies from bank credit is then interpreted as a pursuit of cost reduction, of which financial cost is of course an important component.

Another analysis is based on the behavior of banks. Faced with the risk of multiple business bankruptcies and thus default, they would reduce their loan offers to firms.

It is noteworthy that surveys on corporate behavior do not support the decisive role of interest rates.

In particular, the fear of bankruptcy risk arising from the large number of bankruptcies recorded has been decisive in the debt reduction behavior of companies.

Dr.Yaşam Ayavefe