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Mr. Federico J Diez, Mr. Romain A Duval, Jiayue Fan, José Garrido, Sebnem Kalemli-Ozcan, Chiara Maggi, and Mr. Nicola Pierri
The COVID-19 pandemic has increased insolvency risks, especially among small and medium enterprises (SMEs), which are vastly overrepresented in hard-hit sectors. Without government intervention, even firms that are viable a priori could end up being liquidated—particularly in sectors characterized by labor-intensive technologies, threatening both macroeconomic and social stability. This staff discussion note assesses the impact of the pandemic on SME insolvency risks and policy options to address them. It quantifies the impact of weaker aggregate demand, changes in sectoral consumption patterns, and lockdowns on firm balance sheets and estimates the impact of a range of policy options, for a large sample of SMEs in (mostly) advanced economies.
Mr. Christian H Ebeke, Nemanja Jovanovic, Ms. Laura Valderrama, and Jing Zhou
The spread of COVID-19, containment measures, and general uncertainty led to a sharp reduction in activity in the first half of 2020. Europe was hit particularly hard—the economic contraction in 2020 is estimated to have been among the largest in the world—with potentially severe repercussions on its nonfinancial corporations. A wave of corporate bankruptcies would generate mass unemployment, and a loss of productive capacity and firm-specific human capital. With many SMEs in Europe relying primarily on the banking sector for external finance, stress in the corporate sector could easily translate into pressures in the banking system (Aiyar et al., forthcoming).
International Monetary Fund. European Dept.
France is among the countries most affected by the global pandemic, both in terms of health and economic impact. Output is expected to have declined by around 9 percent in 2020. The authorities put in place a large emergency fiscal package to address the crisis, focused on preserving jobs and providing liquidity for households and firms, supplemented by additional stimulus measures to support the economic recovery in 2021 and beyond. The banking sector entered the crisis with comfortable buffers and, together with the support of the ECB’s accommodative monetary policy, facilitated the provision of credit to the economy. The increased leverage, however, poses solvency risks to the corporate sector. A partial recovery with GDP growth at about 5½ percent is expected in 2021. Risks to the outlook are large, dominated by the virus dynamics and, together with other risks, tilted somewhat to the downside.
International Monetary Fund. Monetary and Capital Markets Department
The FSAP work was mostly conducted prior to the COVID-19 crisis. Given the FSAP’s focus on medium-term challenges and tail risks, its findings and recommendations for strengthening policy and institutional frameworks remain pertinent. As the growth projections were significantly revised downward since the FSAP, the quantitative risk analysis on bank solvency was complemented to include illustrative scenarios to quantify the possible implications of the COVID-19 shock on bank solvency.
International Monetary Fund. Monetary and Capital Markets Department
The Financial Sector Assessment Program (FSAP) work was conducted prior to the COVID-19 pandemic. This report, however, includes stability analysis and stress tests under updated illustrative scenarios to quantify the possible implications of the COVID-19 shock on bank solvency. An unusually high degree of caution must be exercised in interpreting the stress tests results and their implications or validity at the current juncture, due to heightened uncertainty around post COVID central projections and downside risks. Financial vulnerabilities were elevated on the eve of the COVID-19 pandemic. Key financial vulnerabilities included high household leverage amid high real estate valuations following a long period of loose financial conditions. There were also signs of risk taking in some sectors, such as commercial real estate (CRE), and in addition, there were downside risks to bank profitability amid the low-interest-rate environment.