International Monetary Fund
Corporate Liquidity and Solvency in Europe during COVID-19: The Role of Policies
Christian Ebeke, Nemanja Jovanovic, Laura Valderrama, and Jing Zhou

The role of corporate support public policies to overcome the crisis

The IMF´s working paper “Corporate Liquidity and Solvency in Europe during covid-19: The Role of Policies”, analyzes the effectiveness of public policies already implemented in mitigating corporate stress in Europe due to the pandemic. The report concludes that these policies have been essential to mitigate corporate´s liquidity and equity shortfalls and to save employment, however the IMF estimates that without additional equity support, almost 3 million firms would become insolvent, and some 15 million jobs are at risk.

The  report is based on data of over four million European firms across 26 European countries and contains the following key findings:

  • Corporate European support has been essential in avoiding mass bankruptcies and a surged in corporate defaults, offsetting the very sharp decline in economic activity due to the pandemic. The report estimates that their impact could have saved 15% of employment and almost a quarter of value added in Europe.
  • Corporate European support has been more effective in addressing liquidity gaps than solvency gaps:  According to the report, “Public support is estimated to have filled 60% of European firms’ liquidity needs due to the covid-19 shock, but only 30% of the equity shortfalls”. These remaining gaps will trigger corporate defaults and employment destruction if there is not a refocusing of public policies. 
  • European firms will need more equity support to address solvency risks: According to IMF´s estimates, “the share of insolvent firms would increase by 6 percentage points to 17% in European advance Economies” and it alerts that without additional equity support “almost 3 million firms would become insolvent”, putting at risk about 8% of the European jobs (around 15 million jobs). To avoid this scenario the IMF estimates that: “about 2% to 3% of GDP will be needed to close the equity gap and provide firms sufficient equity so they would no longer be in difficulty”. The reports highlights that solvency gaps are higher for SMEs and for contact-sensitive sectors (such as accommodation, food services and entertainment), segments that have also been more affected by liquidity shortfalls.
  • Key role of banks in the viability assessment:  Refocusing of policies on strengthening firm capital structure of viable but vulnerable companies will be crucial looking ahead. The report remarks that “identifying viable firm’s remains a formidable challenge” and that the financial sector and private creditors will need to have a key role in the viability assessment for a large number of firms, “given their knowledge of the firms”, and bearing in mind that it will be difficult for governments to undertake this task.

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