CFDP 2233R

Financing Firms in Hibernation during the COVID-19 Pandemic

Publication Date: May 2020

Revision Date: September 2020

Pages: 31

Abstract: 

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.

Keywords: Cash crush, Coronavirus, Credit risk, Financial policies, Firm relationships

JEL Classification Codes: G21, G28, G32, G33, G38, I18

JEL Classification Codes: G21G28G32G33G38I18