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Governments and central banks responded to the pandemic with unprecedented economic support. Because of the urgent need, the help many provided to companies was quick and untargeted. Many firms obtained grants and access to credit was eased.
However, as the pandemic drags on, that corporate support needs to become more targeted. It should ensure that corporate resources are reallocated toward the shifting needs of the post-pandemic economy, instead of preserving the status quo. Over-indebted corporate balance sheets will also need to be restructured. Fortunately, much of the support can be wound down as vaccines are rolled out. So the call on government funds will not be unlimited.
A new G30 study, which Mario Draghi and I chaired, lays out the principles and options that policymakers face in restoring the corporate sector to health. The aim is to ensure a sustained recovery where companies invest and create jobs. Corporations, especially small and medium enterprises, face a growing problem of solvency that is being made worse the longer the pandemic inhibits activity. But many of the usual indicators of financial stress are currently masked by the massive liquidity support given to companies, moratoria on their debt payments and regulatory forbearance. As these end in the coming year, an increasing number of insolvencies is likely to occur.
This distress will spread if it goes unaddressed. For example, if many shops on a street are shuttered, shopping there becomes an unattractive prospect and the remaining shops will lose business too. Conversely, indefinite taxpayer support to unviable businesses can create excess competition for shrunken demand, which erodes the health of viable companies. So how should authorities prepare?
Countries across the world differ significantly in the resources that they have available. Their institutional capabilities also vary in areas such as the speed of their bankruptcy regimes, the expertise of government institutions in investing funds in private firms, and private sector skills in dealing with financial distress. Political priorities such as greening the economy, and public sensitivity to nationalisation or taxpayer support given to private firms, will also differ. Starting with a clear definition of their priorities and available resources, authorities will therefore have to tailor policies so as to make best use of their institutional capabilities while respecting public views about state intervention. There cannot be a one-size-fits-all approach.
Nevertheless, it is possible to outline some common themes. Targeting support requires judgment about which firms and sectors are viable, and an understanding about where there are market failures that impede private action by itself. Wherever possible, authorities will want to work with private sector players who are more experienced at assessing long-term corporate sustainability. To that end, authorities should ensure that these players have skin in the game.
For instance, officials could lower the amount they guarantee of each loan a private partner makes, or pay for only a fraction of the losses on their entire credit portfolio. Authorities could also require government-supported loans be tied to the ultimate beneficiary’s evolving credit risk (also known as performance pricing) so that borrowers have an incentive to improve their credit quality.
Many over-indebted firms will need their debts restructured. Apart from altering bankruptcy laws where needed, so that bankruptcy rehabilitates rather than liquidates companies, authorities should facilitate out-of-court restructurings where possible so that courts are not overwhelmed. A temporary waiver on treating loan writedowns as taxable borrower incomes could also be considered. Specialised institutions such as “bad banks”, which aggregate and recover bad loans, could also be encouraged, in part by supporting the trading of bad debt.
Some firms may need fresh equity, even after restructuring their debts. Initiatives such as the US government’s 2009 public-private investment programme, which co-invested funds in private assets alongside private partners, may offer useful lessons.
It will be tempting for the authorities to add conditionality to their support. Such conditions are clearly warranted when they coincide with the long-term needs of a sector. However, they merit careful examination in cases where they add significant costs that impede the commercial recovery of already-weak firms.
Inevitably, some companies will need to close as existing support programmes end; their workers should be helped as they look for new jobs. Also, as loan losses are recognised, authorities must heed the health of the financial sector: in some countries, key financial firms may need capital support, and this should be planned for. Lastly, government intervention cannot be permanent and should have a clear exit path.
The year ahead is going to be tough. Hard decisions will be required, perhaps harder than this year’s. Nonetheless, policymakers have both the instruments and working examples of how to engineer a strong, broad-based and sustained recovery. They should prepare to use them.
The writer is a professor of finance at the Chicago Booth School of Business. Stuart Mackintosh contributed