The Covid-19 crisis has brought many sectors of the global economy to a halt. Firms in these sectors have no revenues while the lockdown is in place, yet they still pay salaries, rents, and debt interest. These expenditures are often deferred – including through government-sponsored programs – but rarely waived. The hiatus increases financial pressure on the firms, as a result of which a large number of previously healthy firms may find themselves unable to re-open once the health crisis is over.
Governments have announced crisis response packages to prevent this possibility. A popular policy is loan guarantees that increase firms’ access to credit. For example, in March 2020 the UK government unveiled a scheme for £330 billion of loan guarantees—equivalent to 15% of the country’s GDP—to provide businesses with cash to pay wages and other expenses. Similar approaches have been followed elsewhere, in both advanced and emerging economies.
These programs inject much-needed liquidity in firms, but do not resolve a bigger looming issue: insolvency. The gap between lower-than-expected revenues and piling payables – including the new loans that firms have to eventually repay – has to be addressed. And this is not just the case for retailers, travel agencies, airlines or businesses in hospitality or entertainment, where demand may pick up only gradually even after the crisis. The Covid-19 crisis has exacerbated existing vulnerabilities in other industries and will slow down their recovery. As supply chains around the world are severely disrupted, trade in intermediate goods has collapsed. Some countries have imposed various trade restrictions to keep scarce resources at home. These restrictions have hurt multiple manufacturers, from car makers to furniture builders.
Something has to be done to keep businesses afloat. Two things, in fact. First, governments need to temporarily suspend bankruptcy procedures, which often dictate that illiquid firms’ assets get transferred to their secured creditors, mostly banks. A number of countries have just taken this step. For example, in France bankruptcy law normally gives 45 days from the moment a debtor can no longer pay its debts to filing for bankruptcy. President Macron issued an order that the firms will have three months after the end of the state of emergency (i.e. as things now stand, until September 2020) to file for bankruptcy if needed. The Germany parliament passed a temporary suspension of the firms’ obligation to file for bankruptcy. The suspension is valid until September 2020, with an extension to March 2021 – a one-year delay so firms can stand on their feet. Similar suspensions have taken place in Australia, India, Spain and the United Kingdom. Others will follow.
Second, governments can design a post-crisis restart procedure, whereby they and all other creditors agree on a formula for reducing the debt burden on businesses. Reduction realistically means writing off a portion of the debt, as no amount of debt restructuring over time is likely to be sufficient. Governments have a hold on all other creditors as the latter will also be indebted to the Treasury either through overdue taxes or through participation in government rescue packages.
Imagine, for example, that after laborious calculations economists come up with a magic number – say, 42 – of the discount on all outstanding debt (both public and private) needed so that the majority of firms are able to re-open. The government enforces the discount on all creditors and – voila! – the economy restarts with a jolt.
There are some complications. First, some firms would not be able to re-open even after such a large discount. These firms would follow the normal insolvency process and be reorganised or closed. Second, banks may argue that their claims come before those of, say, landlords. Indeed, this is the case by law in ordinary times. But these are not ordinary times. Also, banks are usually among the first to receive government bailouts. Let’s remember the UK government’s £37 billion bailout of Northern Rock in 2007. Finally, the scale of this write-off may dwarf anything done in recent memory. Parliaments should be prepared for bold action.
Also by Erica Bosio and Simeon Djankov on supporting the economy after coronavirus:
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Notes:
- This blog post expresses the views of its author(s), not the position of LSE Business Review or the London School of Economics.
- Featured image by Richard Lee on Unsplash
- When you leave a comment, you’re agreeing to our Comment Policy
Erica Bosio is a researcher at the World Bank Group, where her work focuses on public procurement. Previously, she worked in the arbitration and litigation department of Cleary Gottlieb Steen & Hamilton in Milan. She holds a Master of Laws from Georgetown University and a degree in law from the University of Turin (Italy).
Simeon Djankov is policy director of the Financial Markets Group at LSE and a senior fellow at the Peterson Institute for International Economics (PIIE). He was deputy prime minister and minister of finance of Bulgaria from 2009 to 2013. Prior to his cabinet appointment, Djankov was chief economist of the finance and private sector vice presidency of the World Bank. He is the founder of the World Bank’s Doing Business project. He is author of Inside the Euro Crisis: An Eyewitness Account (2014) and principal author of the World Development Report 2002. He is also coeditor of The Great Rebirth: Lessons from the Victory of Capitalism over Communism (2014).
Dear all, living the land / starting with food, would be the proper way to reboot the economy.
After Brexit, ‘exit’.
A return to ‘normality’ is not desirable because it will usher in the next pandemic. Local economies (LEs, plural) are the way forward.The role played by LEs—economies of many infinite strands—is pivotal. A country without LEs is a failed country. Local locals and traders would necessarily engage at multiple levels in ALL there is to be done given rise to the regional economy and then the national one. The major either/or scenarios are:
either local economies, which stand for a whole range of upbeat activities, a capillary system of local centres of learning and production, infinite opportunities as offered by that very learning, and meaningful employment too for all
or the spectre of more imports from other countries, depleted soils, stressed water areas, mega economies of scale with subsequent expanding areas of unemployment and depravation, and poor and debilitating health. Hence the pandemic. There is a lot to be said about an immune system in tatters and frail and emaciated individuals.
Either good or bad things. Either joy and compassion or the horrors of our ways.
Thus wrote Lady Eve Balfour, herself a Suffolk farmer, “If fresh food is necessary to health in man and beast, then that food must be provided not only from our own soil but as near as possible to the source of consumption. If this involves fewer imports and consequent repercussions on exports then it is industry that must be readjusted to the needs of food … “ (Lady Eve, 1898-1990) It wasn’t to be. I think the quotation takes us back to 1948, the year the NHS was set up.
Let’s neither underestimate nor forget food. Food is the fons et origo of all knowledge, of culture and traditions, trade, ecology and science. Food is short for everything … land, people, farming, water, health, energy, plants and trees, education. Growing food, harvesting water and harnessing energy open the door to knowledge. All is contained within the essentials of life. If this primary condition is not met then expect learning, education and knowledge to suffer. Ditto for other areas of concern linked to the culling of local economies.
MY WORK IN SHORTHAND
THE WAY FORWARD: Living the land is the way forward. A question arises, “Can we have a food, water and energy education, please?” The answer to this question will determine how we, we again, our human species, will conduct our business.
LIVING THE LAND: Living the land can provide the answer to many of our predicaments.
MY CONTRIBUTION: When it comes to our environments, the social and physical ones, a fresh start is all we need (and a big change of heart too).
A FRESH START
Harbouring life are our most precious Treasures: food, water and energy. This is a given.
The stage is set for us to grow this food, harvest this water and harness this energy.
Food is energy as much as energy is human endeavour. The benefits of living the land are unparalleled.
WHAT HINDERS US
None of the above is part of our upbringing (implying family structures) and education (implying social structures).
MY TEXTBOOK
Title: MUM DAD ADAM EVE
Subtitle: Where Else Would Children’s Memories Reside?
Length: 65,000 words
http://startwithfood.net/wp-content/uploads/2018/03/mum-dad-adam-eve.pdf
Poems: 2
Illustrations: 5
Genre: Allegory. Critical/Seminal/Literary Work
Mum Dad Depicted therein are the daily interactions developing within a Most Idyllic Household. Three Easy Steps take you on a guided tour sightseeing this development. Obstacles however bar the way. Mum and dad of our story soon realise that their best efforts are being thwarted by an upbeat but brutish King State. The King State causes Life to suffer infinite torment and anguish. Enduring the ordeal are the mums, dads and kids of modern times.
Adam Eve A tree of knowledge is premised on a knowledge of trees. Trees harbour Life. They produce crops and induce knowledge in one single process. This is knowledge. In the Bible, however, many references to the fruits of the land were markedly depicted as challenging or as having strings attached to them. Prohibitions were common. It was knowledge itself that was denied and (our grown-up?) Adam and Eve bear witness to that. Put yourself in their shoes. After a promising start, Adam lost his plum job in the garden and that seemed to have put an end to that experiment.
And that was not the only experiment that went awry. God never had a good word for learning showing he was not quite au fait with Creation. Genesis itself was an amalgam of broken promises. Overall, with the Bible we have a blueprint for all our woes.
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Drawn by the two stories is a parallel between a Most Idyllic Household (Mum Dad) and a Garden in Eden (Adam Eve). These are two tragic stories that speak of a lesser humanity.
We must open a dialogue.
My best wishes, Mario