Balance sheet adjustments played a critical role in the impairment of financial systems in developed economies, by sharply reducing their capacity to provide finance. In turn, this probably contributed to both the magnitude and persistence of the slowdown in growth.
By contrast, while EMEs were hit by liquidity constraints, which I referred to earlier in the Indian context, the stability of balance sheets as a result of a more “traditional” structure helped to preserve the systems’ capacity to provide finance. Liquidity infusions quickly transmitted through to businesses and helped prevent the escalation from liquidity to solvency problems.