The coronavirus pandemic, by dramatically changing con- sumption patterns and business operations, is triggering a major corporate solvency crisis in many countries. Apart from policies directly supporting employment, initial policy responses to support businesses focused heavily on liquidity issues. Some liquidity support is still needed, but the crucial issue now is solvency.
Policymakers need to act urgently, as the solvency crisis is already eroding the underlying strength of the business sector in many countries. The problem is worse than it appears on the surface, as massive liquidity support, and the confusion caused by the unprecedented nature of this crisis, are masking the full extent of the problem, with a “cliff edge” of insolvencies coming in many sectors and jurisdictions as support programs lose funding and existing net worth is eaten up by losses. However, the difficulty of predicting the duration and recovery path after the pan- demic, and of differentiating between structural versus temporary changes in demand, makes it hard to determine the long-term viability of enterprises during the pandemic. This complicates the targeting and design of measures to support the corporate sector.
This solvency crisis differs sharply from the global financial crisis, which centered on the financial system and on liquidity problems. Some of the answers from that previous crisis are valid now, but new approaches are also needed.
The first wave of liquidity-focused policy measures has prevented much more severe consequences for the corpo- rate sector, jobs, and for the economy more broadly. As the crisis progresses, jurisdictions now need to develop policy responses that accommodate structural changes in the economy triggered by the pandemic, and address the follow- ing problems that make the initial response unsustainable:
• Inadequate targeting of support, which fails to suffi- ciently tailor the policy response to the situations of different firms
• An excessive focus on credit provision, which risks over- burdening firms with debt, promoting inefficient use of resources, and engendering future problems
• Excessive direct government decision-making and sub- optimal use of private sector expertise that could be used to better direct support
• A level of public spending that would be unsustainable over the potential duration of the ongoing economic crisis.
In this report we recommend for policymakers:
• A set of universal core principles to guide the design of the policy response
• A set of potential tools with which to respond
• A decision framework to determine appropriate policy
responses for a specific jurisdiction.
Our objective is to encourage the development of policy actions that support long-term economic resilience and growth, and broad-based improvements in living standards, while minimizing the costs to the public.
Desirable, and feasible, responses will vary across nations and regions due to differences in available govern- ment resources, institutional capabilities, and social and political priorities and constraints.