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© 2023 International Monetary Fund
WP/23/16
IMF Working Paper
Fiscal Affairs Department
Evaluating the Costs of Government Credit Support Programs during COVID-19: International Evidence
Prepared by Gee Hee Hong and Deborah Lucas*
Authorized for distribution by Paulo Medas
January 2023
IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.
ABSTRACT: Advanced economies made available more than 5 trillion USD through government-supported credit guarantee and direct loan programs to provide lifelines to firms in the face of the COVID-19 pandemic. Notwithstanding the unprecedented scale of credit made available, an in-depth analysis of the fiscal consequences is missing, and the costs of these programs are not recognized in a transparent way. In this paper, we fill in an important aspect of the fiscal picture by estimating the subsidies that were provided by the largest credit guarantee programs introduced in 2020 in seven advanced economies. We estimate the subsidies on a fair value basis that provides a consistent and comprehensive upfront measure of cost. We explain the logic behind applying a fair value framework in a government context and compare it to alternative approaches. For the programs that we examine, total credit extended totaled 1.7 trillion USD. The subsidy element (cash-equivalent subsidy) is estimated to be 67 percent of loan principal on average (37 percent, excluding the US PPP), with a wide range across programs, from 12 to 100 percent. The variation is explained by differences across programs including eligibility criteria, loan terms, compensation to lenders, and other program design choices.
| JEL Classification Numbers: | H0, H3, H4, H5, H6 |
| Keywords: | credit guarantee programs; fair-value basis; COVID-19; fiscal risks |
| Author’s E-Mail Address: | ghong@imf.org, dlucas@mit.edu |
| JEL Classification Numbers: | H0, H3, H4, H5, H6 |
| Keywords: | credit guarantee programs; fair-value basis; COVID-19; fiscal risks |
| Author’s E-Mail Address: | ghong@imf.org, dlucas@mit.edu |
Title Page
WORKING PAPERS
Evaluating the Costs of Government Credit Support Programs during COVID-19: International Evidence
Prepared by Gee Hee Hong and Deborah Lucas
Contents
Executive Summary
1. Introduction
2. Government Credit-Support Programs form Firms during the COVID-19 Pandemic
3. Estimating Subsidy Cost
3.1. Rationale for Fair-Value Cost Estimation for Credit Assistance
3.2. Calculating Subsidy Element
3.2. Further Considerations for Inferring Discount Rates and Cash Flows
4. Subsidy Element Estimates for Pandemic Credit Programs
5. Sensitivity Analysis
6. Conclusion
Annex I. Selected Program Information
Annex II. Further Considerations in Applying Fair Value Principles
References
BOXES
1. Debt Moratorium for Firms
FIGURES
1. Announced Discretionary Fiscal Response to the COVID-19 Crisis in Selected Advanced Economies
2. Credit Guarantee Programs during COVID-19: Unused vs. Commited
3. Take-Up (percent of total envelope)
4. Total Subsidy Element by Guarantee Scheme
5. Total Subsidy Element by Country (USD billions and percent of GDP)
6. Subsidy Element and Take-Up (USD Billion)
7. Correlations between Total Subsidy to Average Maturity and Guarantee Share
8. Correlation between Take-Up and Subsidy Element by Guarantee Scheme
9. Sensitivity Analysis: Faire-Value Lending Rates
10. Sensitivity Analysis: Loan Maturity
TABLES
1. List of Major Credit Programs by Country
Email: ghong@imf.org, dlucas@mit.edu. Deborah Lucas is at MIT Sloan School of Management and the director of the MIT Golub Center for Finance and Policy. Gee Hee Hong is at the Fiscal Affairs Department of the IMF. We would like to thank Vitor Gaspar, Paolo Mauro, Paulo Medas, Raphael Espinoza, Raphael Lam, Bryn Battersby, Amanda Sayegh, Sandeep Saxena, Fritz Bachmair, Chris Marrison, Takuma Hisanaga, Aiko Mineshima, Divya Kirti, Ramon Hurtado, Ozlem Ayden, the seminar participants at the IMF Fiscal Affairs seminar, and the MIT finance bag lunch for their helpful comments. We would also like to Julia Anderson, Nicolas Véron, the Office for Budget Responsibility, KfW, Direction Générale du Trésor, Banca d’Italia, Ministero dell’Economia e delle Finanze, and the Instituto de Crédito Oficial for their discussions. All remaining errors are our own. The views expressed are those of the authors and do not necessarily represent the views of the IMF, its Executive Board or IMF Management.