The coronavirus (COVID-19) pandemic halted economic activity worldwide, hurting firms and pushing many of them toward bankruptcy. This paper discusses four central issues that have emerged in the academic and policy debates related to firm financing during the downturn. First, the economic crisis triggered by the pandemic is radically different from past crises, with important consequences for optimal policy responses. Second, it is important to preserve firms’ relationships with key stakeholders (like workers, suppliers, customers, and creditors) to avoid inefficient bankruptcies and long-term detrimental economic effects. Third, firms can benefit from “hibernation,” incurring the minimum bare expenses necessary to withstand the pandemic, while using credit if needed to remain alive until the crisis subdues. Fourth, the existing legal and regulatory infrastructure is ill-equipped to deal with an exogenous systemic shock like a pandemic. Financial sector policies can help increase the provision of credit, while posing difficult choices and trade-offs.
Who pays for financial crises? What are the mechanisms for spreading the cost across different social groups? The literature is only beginning to provide answers to these crucial questions. Several papers measure the depth and duration of crises, defined as the cumulative output loss and recovery time, and conclude that these crises have been very costly for developed and emerging economies. The period 1973-97 registered more than forty-four crises in developed countries and ninety-five in emerging markets, with average output losses of 6.25 percent and 9.21 percent of gross domestic product (GDP), respectively.
Different forces and potential benefits are pushing towards increasing financial globalization. However, globalization can carry important risks. This paper reviews the literature on crises and contagion in the context of financial globalization. Countries with weak fundamentals become more prone to crises when they liberalize their financial sectors. Globalization can also lead to crises in countries with sound fundamentals, due to imperfections in financial markets or external factors. Moreover, open economies are exposed to contagion via different channels such as real links, financial links, and herding behavior. Still, in the long run, the net effects of financial globalization are likely to be positive. The main challenge for policymakers is thus to manage the process as to take advantage of the opportunities, while minimizing the risks.