Financing Firms in Hibernation during the COVID-19 Pandemic

31 Pages Posted: 15 May 2020 Last revised: 18 Sep 2020

See all articles by Tatiana Didier

Tatiana Didier

World Bank

Federico Huneeus

Yale University; Central Bank of Chile

Mauricio Larrain

Columbia University

Sergio L. Schmukler

World Bank - Development Research Group (DECRG)

Date Written: May 7, 2020

Abstract

The coronavirus (COVID-19) pandemic has halted economic activity worldwide, hurting firms and pushing them toward bankruptcy. This paper provides a unified framework to organize the policy debate related to firm financing during the downturn, centered along four main points. First, the economic crisis triggered by the spread of the virus is radically different from past crises, with important consequences for optimal policy responses. Second, to avoid inefficient bankruptcies and long-term detrimental effects, it is important to preserve firms' relationships with key stakeholders, like workers, suppliers, customers, and creditors. Third, firms can benefit from “hibernating," using the minimum bare cash necessary to withstand the pandemic, while using credit to remain alive until the crisis subdues. Fourth, the existing legal and regulatory infrastructure is ill-equipped to deal with an exogenous systemic shock such as this pandemic. Financial sector policies can help increase the provision of credit, while posing difficult choices and trade-offs.

Keywords: Cash crush, Coronavirus, Credit risk, Financial policies, Firm relationships

JEL Classification: G21, G28, G32, G33, G38, I18

Suggested Citation

Didier, Tatiana and Huneeus, Federico and Larrain, Mauricio and Schmukler, Sergio, Financing Firms in Hibernation during the COVID-19 Pandemic (May 7, 2020). Cowles Foundation Discussion Paper No. 2233, Available at SSRN: https://ssrn.com/abstract=3598703 or http://dx.doi.org/10.2139/ssrn.3598703

Tatiana Didier

World Bank ( email )

1818 H Street, NW
Washington, DC 20433
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(202)458-1525 (Phone)

Federico Huneeus (Contact Author)

Yale University ( email )

30 Hillhouse Avenue
New Haven, CT 06510
United States

HOME PAGE: http://www.fedehuneeus.com

Central Bank of Chile ( email )

Agustinas 1180 Piso 3
Santiago
Chile

Mauricio Larrain

Columbia University ( email )

3022 Broadway
New York, NY 10027
United States

Sergio Schmukler

World Bank - Development Research Group (DECRG) ( email )

1818 H. Street, N.W.
MSN MC 3-301
Washington, DC 20433
United States
202-458-4167 (Phone)
202-522-3518 (Fax)

HOME PAGE: http://www.worldbank.org/en/about/people/s/sergio-schmukler

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