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COVID-19: guaranteed Loans and Zombie Firms.

ABSTRACT: Based on a survey (7-13 April 2020) we evaluate the reaction of Swiss firms towards the COVID-19 crisis. Firms show little pro-active reactions towards the crisis, but decrease their business activities. The firms in the survey report that the decline in foreign demand is the single most important reason for their deteriorating business situation. Firms that faced a more difficult business situation before the crisis are affected more severely during the crisis. Moreover, we investigate the impact of the Swiss federal loan program (Bundeshilfe) on the business activities. To this end, we develop a stylized theoretical model of financially constrained heterogeneous firms. We find that policy makers face a trade-off between immediate higher unemployment rates and long-term higher public spending. The former arises from a combination of a too strong economic impact of the COVID-19 lockdown (demand drop) and too low levels of loans provided. Nevertheless, providing (too) high levels of loans to firms creates zombie firms that are going to default in the future leading to an increase in public spending. (JEL codes: D22, D25, D84, and G33).

SUBMITTER: Zoller-Rydzek B

PROVIDER: S-EPMC7799295 | biostudies-literature | 2020 Dec

REPOSITORIES: biostudies-literature

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COVID-19: guaranteed Loans and Zombie Firms.

Zoller-Rydzek Benedikt B Keller Florian F

CESifo economic studies 20201206 4

Based on a survey (7-13 April 2020) we evaluate the reaction of Swiss firms towards the COVID-19 crisis. Firms show little pro-active reactions towards the crisis, but decrease their business activities. The firms in the survey report that the decline in foreign demand is the single most important reason for their deteriorating business situation. Firms that faced a more difficult business situation before the crisis are affected more severely during the crisis. Moreover, we investigate the impa ...[more]

PMID: 34191927

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Project description:ContextIn contrast to bilateral aid, aid disbursed from multilateral institutions increased significantly at the onset of the COVID-19 pandemic. Yet, at a time when a coherent and effective multilateral response is needed most, the COVID-19 pandemic revealed a shifting landscape of donor agencies that struggle with basic functions, such as cross-national coordination. While multilaterals are uniquely positioned to transcend national priorities and respond to pandemics, functionally we find official development assistance (ODA) from these entities may increasingly mimic the attributes of bilateral aid. We explore three important, but not comprehensive, attributes of aid leading up to and during the COVID-19 pandemic: (1) earmarking, (2) donor concentration and (3) aid modality.MethodsWe examine ODA disbursements over time in 2020 constant prices from 2010 to 2021 and plot share of inflow that is earmarked against each United Nations multilateral against their average annual financing volume. We then assess market diversity with two measures: the Shannon-Weiner Function and Gini-Simpson Index. Finally, we examine financing vehicles used to disburse and look at 'grant share' of total ODA from all formal donors over time.FindingsWe find that while the absolute number of formal multilateral actors and market diversity have been increasing since 2011, there has been a concurrent market consolidation led by the World Bank Group at 37% of market share in 2021. This coincides with an increasing prevalence of earmarking of aid inflows to the multilateral system and, unique to multilaterals but concerning given increasing debt risk, a rise in loan-based ODA disbursements.ConclusionsIn theory, this consolidation may streamline revenue pooling and allow for a more collective approach to mitigating pandemic risk but, paired with increased earmarking, has the potential to sideline both collective goals (eg, the Sustainable Development Goals) and counties' core mandates (such as the pursuit of universal health coverage).

Project description:Abstract This paper investigates the consequences of the COVID-19 crisis on firms’ performance and financial vulnerability. Exploiting longitudinal firm-level data from the World Bank’s “Enterprise Surveys follow-up on COVID-19” for 20 European countries, we assess whether green management quality and pre-pandemic credit access difficulties affect firms’ ability to withstand the negative impact of the pandemic. Our results indicate that green firms are more resilient to the pandemic shock. In particular, the likelihood of pandemic-induced drops in sales and liquidity significantly decreases as the quality of green management improves. Conversely, prior financing constraints strongly exacerbate the pandemic’s impact on firms’ performance and amplify liquidity stress and financing problems. Credit-constrained enterprises are not only more likely to experience liquidity shortages and repayment problems, but they also face higher difficulties in accessing bank financing. The COVID-19 crisis has also hampered the beneficial role that green management exerted on access to credit in the pre-pandemic period. During the pandemic, firms with sound environmental management practices do not benefit from improved access to finance and have a lower demand for credit, possibly suggesting a slowdown in their green investment activities. Supplementary information The online version contains supplementary material available at 10.1007/s11187-023-00759-1. Green firms are more resilient to the COVID-19 shock, while prior credit access difficulties strongly exacerbate the pandemic’s impact on businesses. Using data on firms from 20 European countries, we find that enterprises with sound environmental management practices have a lower probability of pandemic-induced reductions in sales and liquidity. Pre-pandemic financing constraints significantly impair firms’ economic and financial performance and increase difficulties in accessing bank credit during the COVID-19 crisis. Our results suggest that public policies, aimed at encouraging firms’ environmentally sustainable behaviours and at supporting their access to credit, may contribute to strengthen the resilience of the economic system to unexpected shocks and favour the transition to a sustainable economy. Furthermore, the awareness of the competitive advantages offered by eco-sustainable practices may represent an incentive form firms to improve their environmental management quality and increase investment in green technologies. Supplementary information The online version contains supplementary material available at 10.1007/s11187-023-00759-1.

Dataset Information

COVID-19: guaranteed Loans and Zombie Firms.

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COVID-19: guaranteed Loans and Zombie Firms.

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