Fitch Sounds Warning On Corporate Debt Loophole Of Trade Finance

Casper de Vries, professor of monetary economics at Erasmus School of Economics

According to Fitch Ratings there is a trade finance-related corporate accounting loophole that may be widespread in the U.S. and Europe, and it could be contributing to longer supplier payment terms. Outlined in Fitch Ratings’ report, “What Investors Want To Know: Supply Chain Finance,” that loophole allows companies to extend their Days Payable Outstanding by using third-party supply chain financing, which does not have to be classified as debt, allowing those companies, in essence, to keep that debt hidden.

Professor Caper de Vries has participated in a panel discussion on BNR Nieuwsradio about this topic, together with senior economists Bert Colijn (ING) and Edin Mujagić (OHV vermogensbeheer). According to Professor Casper de Vries, the cost of debt in many countries is tax-deductible while the remuneration for equity (dividends) is not deductible. Theoretically, this unequal treatment gives a bank - as any other firm - an incentive to take on more debt. In answer to what could be the solution to this problem, Casper de Vries refers to a paper of the Belgium ECB economist, Glenn Schepens. His findings confirm that reducing the tax discrimination between debt and equity could be an innovative policy tool for bank regulators.

More information

Listen to the entire panel discussion (in Dutch) on BNR Nieuwsradio, 6 August 2018