Publication Date: May 2020
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.
Keywords: Cash crush, Coronavirus, Credit risk, Financial policies, Firm relationships
JEL Classification Codes: G21, G28, G32, G33, G38, I18