Publication Date: May 2020
Revision Date: September 2020
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, I18CFDP 2233