Thread by @JAndritzky

How to prevent mass corporate bankruptcies?

Here is an overview of national measures to support businesses.

These schemes share the burden of #Covid19 losses with *national* taxpayers. No European backstop in sight, leaving a patchwork and uneven playing field!

A thread. 1/N

What is there already?

1) Basically all countries have extended furlough or short-time work benefits. This supports both workers and firms.

Complementing this, some countries temporarily exempt employers from social security contributions (e.g., Slovak Republic, Spain).

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Europe’s comprehensive job protection & social security systems should protect household incomes and allow firms to retain staff, helping them when the economy unfreezes.

All this should, if well calibrated, allow speedier recovery from the #Covid19 lockdown than, e.g. US.

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2) Austria has introduced a scheme to partly reimburse fixed costs for companies losing significant turnover.

This directly supports firms’ solvency and is well suited for mid-sized enterprises. But the schemes are tricky to develop and resource-intense to administer.

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3) Many countries have rapid cash transfer schemes, although amounts are limited and eligibility sometimes narrow. Quick disbursement can be marred by fraud.

Such schemes give essential relief to firms in the short term. But the support is not well targeted and small.

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4) Austria offers firms to convert some loans partly into grants. (Also, the US SBA Paycheck Protection Program offers forgivable loans.)

Banks may be best suited to allocate loans as they know their clients. Delayed grant-conversion relieves the stretched administration.

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Several countries promote debt moratoria. These need to walk a fine line between helping firms’ liquidity and burdening banks.

Relaxing NPL rules must not lead to evergreening. Halting foreclosures or bankruptcy filings can ultimately shift more of the burden onto banks.

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5) For direct equity participation in large companies, Germany has created a EUR100bln fund.

Such equity could be structured in different ways (see Soffin/TARP/etc. during #GFC). Important to ensure commercial governance and a clear plan to exit the investment

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What else?

Tax obligations are often deferred (up to 3 years in Latvia!), but not forgiven.

Relaxing limits on loss carrybacks (e.g. until 2014 in Slovak Rep) can boost profitable companies.

For Germany, see proposals by @SVR_Wirtschaft & @D_Langenmayr.

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.@PeterBofinger and @michael_huether propose a temporary negative tax for firms and self-employed. These tax reductions on 2019 earnings could result in paybacks of tax advances.

In Germany, the scheme could transfer up to EUR24bln (0.7% GDP).

welt.de/wirtschaft/art…

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Europe’s bank-based economies with many SMEs make channeling equity through banks attractive.

Public development banks could offer equity, such as @EBRD.

F. Galizia @el_BID has an interesting essay on bank equity-financing: publications.iadb.org/en/equity-fina…

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Above measures are national schemes. Many countries have limited fiscal space and are holding back, endangering full recovery from #Covid19 crisis.

European schemes could help and prevent corporate-sovereign doom loops!

My ideas for EIB-EIF and a corporate SRM here👇🏼

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https://twitter.com/jandritzky/status/1243913964624449537

Related, @beckerbobo et al. call for a role of the state in out-of-court corporate debt renegotiations and temporary nationalisations.

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voxeu.org/article/corpor…

Boot et al. also propose a European Pandemic Equity Fund for cash-for-tax scheme: equity-like payouts are later repaid through temporary, elevated taxes on a firm’s future profits. @JanKrahnen

voxeu.org/article/try-eq…

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Surely more proposals are out there!

CC @PeterBofinger @michael_huether @JanKrahnen @D_Langenmayr @Lars_Feld @ErikFossing @GuntramWolff @DeboraRevoltel1 @COdendahl @NickMalkoutzis @RobinBrooksIIF @AGarciaPascual @MFratzscher @jfkirkegaard @nicolas_veron

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Note this thread is on direct solvency-enhancing measures. The large extent of liquidity support to firms also helps, but is unlikely sufficient to prevent large-scale solvency issues in the corporate sector that can weigh on future growth.

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