Thread by @R2Rsquared

** Throwing a #COVID19 Liquidity Life-Line

Governments need to throw firms a liquidity life-line for them to survive the, temporary yet dramatic, drop in revenues. Here is a proposal on how to do so in Europe.
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scholar.princeton.edu/sites/default/…

Firms need to pay wages to their employees and debts to banks and suppliers. Otherwise, default will cascade through firms and economic sectors and across borders, and the impact on productive capacity may well be permanent.
Need direct funding on a large scale with urgency
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A Euro-wide scheme that achieves the needed funding would involve the @ecb and the @EIB in cooperation with the national authorities, and complementing national policies. It could be formed by three steps:
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1) The @EIB granting loans to all firms solely to cover payments due, at 0% interest, paid back in the form of an annuity over the next few (say, 8) years.
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2) Recovery of loan instalments entrusted to national tax authorities, as an add-on to tax liabilities. Use the superior technology of tax authorities to enforce repayment.
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3) The @EIB issues bonds, and the @ecb provides the liquidity to buy them in the immediate run. Only @ecb has the liquidity provision power for a scheme of this dimension.
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Why not channel these loans via banks? As firms repay debts, this reduces NPLs. Fragile banks don't need to intermediate credit. Focus on firms, not on banks.
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Why do this at the European rather than at the national level? This policy complements national policies. But if some countries can't respond enough now, the cascade of defaults and drop in consumption will affect all. Also, politically, the EU must rise to the challenge.
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This proposal laid out in a short note with Markus Brunnermeier @MarkusEconomist, Jean-Pierre Landau @JPLandau, and Marco Pagano.
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scholar.princeton.edu/sites/default/…