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Financing Firms in Hibernation during the COVID-19 Pandemic (English)

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.

Details

  • Author

    Didier Brandao,Tatiana, Huneeus,Federico, Larrain,Mauricio, Schmukler,Sergio L.

  • Document Date

    2020/05/08

  • Document Type

    Policy Research Working Paper

  • Report Number

    WPS9236

  • Volume No

    1

  • Total Volume(s)

    1

  • Country

    World,

  • Region

    The World Region,

  • Disclosure Date

    2020/05/08

  • Disclosure Status

    Disclosed

  • Doc Name

    Financing Firms in Hibernation during the COVID-19 Pandemic

  • Keywords

    small and medium enterprise; development research group; intermediate input to production; lender of last resort; automatic stay in bankruptcy; provision of credit; asian financial crisis; financial sector policy; state-owned banks; chance of survival; stock market index; lower interest rate; cost of fund; Corporate Debt Restructuring; access to fund; credit market imperfection; value of saving; bank capital regulation; european central bank; commercial real estate; deferral of tax; high risk aversion; payments coming due; private sector debt; initial exogenous shock; sovereign debt market; capitalization of state; stock market price; global supply chain; labor market dynamic; amount of debt; room for adjustment; Letter of Credit; low credit risk; local labor market; foreign exchange market; health care system; portfolio of loan; creation of knowledge; previous crisis; contingent liabilities; real sector; corporate sector; organizational capital; contingent liability; commercial credit; economic crisis; moral hazard; corporate investment; large corporation; policy option; negative shock; monetary policy; account payable; economic recovery; guarantee program; supply shock; Credit Score; human capital; social distance; firm financing; temporary shock; asset price; regulatory infrastructure; credit line; foreign currency; demand shock; economic recession; disease transmission; crisis episode; cruise line; institutional framework; luxury good; borrowing capacity; crisis resolution; public credit; bankruptcy code; existing credit; health emergency; other sectors; optimal policy; corporate default; government intervention; overall employment; investment pattern; stable job; consumer spend; remote communication; public provision; corporate cash; empirical evidence; social interaction; historical data; net worth; world economy; economic relationship; production chain; deposit insurance; overhead cost; bank lending; regulatory system; retail store; productive activity; cash holding; operational expenditure; theoretic model; production process; working capital; airline industry; labor expense; intangible asset; emerging country; long-term relationship; corporate revenue; across border; designing policy; transitory shock; bankruptcy procedure; empirical result; several options; Labor Law; forbearance measure; credit standing; loan repayment; court renegotiation; liquidity problem; restructuring process; regulatory structure; standard procedure; borrowing cost; external shock; idiosyncratic risk; national community; new client; large debt; initial investment; convertible bond; corporate liability; capital injection; funding source; banking system; bargaining power; cash shortfall; Bank Credit; distribution channel; credit registry; credit guarantee; systemic risk; liquidity policy; production plan; debt burden; existing contract; negative externality; production externality; external demand; international production; international input; trading partner; short notice; production network; downward spiral; capital formation; credit spread; corporate bankruptcy; vicious cycle; aggregate demand; public policy; fiscal policy; Fiscal policies; net asset; equity injection; government revenue; direct expenditure; financial policies; risk tolerance; direct transfer; contractual requirement; banking sector; limited capacity; domestic currencies; debt outstanding; trade credit; term loan; research assistance; e-mail address; corporate bond; infected people; vertical line; virus spread; public health; emergency measure; existing liability; hospital capacity; expected loss; stock price; several months; economic hardship; bridge loan; public security; excessive risk; debt issuance; insolvent bank; digital technology; social insurance; health shock; bankrupt company; policy proposal; open access; development policy; financial market; Research Support

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Citation

Didier Brandao,Tatiana Huneeus,Federico Larrain,Mauricio Schmukler,Sergio L.

Financing Firms in Hibernation during the COVID-19 Pandemic (English). Policy Research working paper,no. WPS 9236,Paper is funded by the Knowledge for Change Program (KCP),Paper is funded by the Strategic Research Program (SRP),COVID-19 (Coronavirus) Washington, D.C. : World Bank Group. http://documents.worldbank.org/curated/en/818801588952012929/Financing-Firms-in-Hibernation-during-the-COVID-19-Pandemic