Financing Firms in Hibernation during the COVID-19 Pandemic
The coronavirus (COVID-19) pandemic has halted economic activity worldwide, hurting firms and pushing them toward bankruptcy. This paper provides a unified framework to organize the policy debate related to firm financing during the downturn, cente...
| Main Authors: | , , , |
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| Format: | Working Paper |
| Language: | English |
| Published: |
World Bank, Washington, DC
2020
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| Subjects: | |
| Online Access: | http://documents.worldbank.org/curated/en/818801588952012929/Financing-Firms-in-Hibernation-during-the-COVID-19-Pandemic http://hdl.handle.net/10986/33745 |
| Summary: | The coronavirus (COVID-19) pandemic has
halted economic activity worldwide, hurting firms and
pushing them toward bankruptcy. This paper provides a
unified framework to organize the policy debate related to
firm financing during the downturn, centered along four main
points. First, the economic crisis triggered by the spread
of the virus is radically different from past crises, with
important consequences for optimal policy responses. Second,
to avoid inefficient bankruptcies and long-term detrimental
effects, it is important to preserve firms'
relationships with key stakeholders, like workers,
suppliers, customers, and creditors. Third, firms can
benefit from "hibernating," using the minimum bare
cash necessary to withstand the pandemic, while using credit
to remain alive until the crisis subdues. Fourth, the
existing legal and regulatory infrastructure is ill-equipped
to deal with an exogenous systemic shock such as this
pandemic. Financial sector policies can help increase the
provision of credit, while posing difficult choices and trade-offs. |
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