Once the C-19 public support actions, including loan guarantees and moratoria, are withdrawn, postponed insolvencies would suddenly materialize and trigger a recessionary dynamic, potentially causing a future ripple of zombie firms and unforeseen liquidations. The current quiet of a low rate of bankruptcies and insolvencies is a retreating sea of troubles before a tidal wave rises out of the spinel-green waters. The first wave of economic troubles for companies that have entered into a second year of distress is nothing compared to the tsunami approaching.
It is vital to sustain the unprecedented public support measures until the recovery is firmly entrenched. Preventing a destructive tsunami of corporate insolvencies and minimising their social cost is crucial if we hope to preserve economic and financial stability. Averting a debt burden that causes companies to nosedive in the wake of the coronavirus crisis and creating a facilitating financial environment that scaffolds them to adapt to lasting structural changes is necessary.
Some governments have already taken a battery of steps to mitigate the risks of a wave of corporate insolvencies, including developing more targeted policies to boost the solvency of otherwise viable companies and streamlining debt restructuring and insolvency procedures. There is merit in increasingly complementing liquidity support with equity support, possibly including quasi-equity and subsidies, for viable but overindebted firms, noting that success in barricading solvency pressures in the non-financial corporate sector remains crucial for minimising the spillover effects of the COVID-19 crisis into the financial sector.
CARICOM governments may consider establishing a regional systemic risk board under the CDB that can contemplate converting public loans up to a certain ceiling to help companies weather the crisis until the end of 2022. Rebuilding economies better and facilitating adjustments to structural change requires that the current public support measures become more targeted as the crisis evolves. There is immeasurable value in improving targeting. There can be no blanket support for all companies affected by lockdown measures. Across the EU, governments will focus on companies that would be viable once restrictions are lifted while ensuring that unviable companies are quickly wound down. France’s Macron hopes to convert some of its €130bn of state guaranteed loans into grants to help SMEs that have been hardest hit by COVID-19.
The deep seated uncertainty surrounding the near-term economic outlook, related to the dynamics of the pandemic, the turbulent rollout of vaccination campaigns, the loss of lockdowns to productive capacity and the debt overhang has attracted the attention of the European Systemic Risk Board (ESRB). The ESRB has noted that the main source of systemic risk in the EU arises from the impact of the pandemic on the solvency of non-financial corporations and, household indebtedness – and a possible spillover to the financial system. Other sectors continue to experience a fall in revenues, while already having exhausted their cash buffers and facing difficulties in rolling over maturing debt.
Along this Caribbean chain of sandbanks embroidered in fishbone and speckled with mother of pearl, the rich and the poor beneath a Krishna blue sky find no hope on any path as the pandemic worsens. They have no one to help carry their bundles of longing as houses and shops shut their eyes. In empty Scarborough, buildings become strangers. Even the houses of the Gods are locked, except Masajids where the liturgical prayers of five Muslims ascend in spirals like fragrant smoke of sweet sandalwood inside minarets and mimbars. To build “Next”, President Joe Biden has rightly rejected the theory of trickledown economics that supports the outlook that serving oligarchs and the opulent benefit those further down the economic ladder.
He said, “We’ve got to build from the bottom up and the middle out.” He intends to spend more federal money on increasing the resilience, diversity, and security of US supply chains and, by extension, revitalizing domestic manufacturing capacity, bolstering research capabilities, and creating jobs. His $2.3 trillion infrastructure plan will build more roads, address educational inequity, build a new school system, and offer job training by taxing the wealthiest Americans and companies. Biden intends to implement six targeted education programs. Each a jewel on its own. Collectively, they form a cradle-to-college agenda that aims to reduce injustices that course through American schools by infusing hundreds of billions of dollars into virtually every level of the system.
Containing the negative feedback loops between the real economy and the financial system is now mandatory. There is also need to review and, where necessary, improve insolvency and collateral enforcement procedures and strengthen the capacity of the judiciary in order to avoid bottlenecks. Looking beyond the recent cyclical developments, the COVID-19 shock may have increased the probability and persistence of a “low-for-long” scenario, making it “even lower for even longer”. Taking a medium-to-long-term perspective, CARICOM must assess all risks related to (i) broad-based risk-taking, (ii) the sustainability of business models, and (iii) structural changes in the financial system. Four main areas of concern remain: (1) the profitability and resilience of banks; (2) the indebtedness and viability of borrowers; (3) systemic liquidity risk; and (4) the sustainability of the business models of insurers and pension funds offering longer-term return guarantees.
