How to restart the economy after Covid-19

Governments can do two things to keep businesses afloat: temporarily suspend bankruptcy procedures, and design a post-crisis restart process, write Erica Bosio and Simeon Djankov

 
The Covid-19 crisis has brought many sectors of the global economy to a halt. Firms in these sectors have no revenues while the lockdown is in place, yet they still pay salaries, rents, and debt interest. These expenditures are often deferred – including through government-sponsored programs – but rarely waived. The hiatus increases financial pressure on the firms, as a result of which a large number of previously healthy firms may find themselves unable to re-open once the health crisis is over.

Governments have announced crisis response packages to prevent this possibility. A popular policy is loan guarantees that increase firms’ access to credit. For example, in March 2020 the UK government unveiled a scheme for £330 billion of loan guarantees—equivalent to 15% of the country’s GDP—to provide businesses with cash to pay wages and other expenses. Similar approaches have been followed elsewhere, in both advanced and emerging economies.

These programs inject much-needed liquidity in firms, but do not resolve a bigger looming issue: insolvency. The gap between lower-than-expected revenues and piling payables – including the new loans that firms have to eventually repay – has to be addressed. And this is not just the case for retailers, travel agencies, airlines or businesses in hospitality or entertainment, where demand may pick up only gradually even after the crisis. The Covid-19 crisis has exacerbated existing vulnerabilities in other industries and will slow down their recovery. As supply chains around the world are severely disrupted, trade in intermediate goods has collapsed. Some countries have imposed various trade restrictions to keep scarce resources at home. These restrictions have hurt multiple manufacturers, from car makers to furniture builders.

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Πηγή: blogs.lse.ac.uk