The economic crisis's speed and scale caused by the Covid-19 pandemic pose major challenges for economic recovery. The role of public policy is decisive. Immediately, public support must be universal, simple and quick to solve the liquidity crisis of companies and maintain the productive capacity through the allocation of subsidies (for example, through the layoff) and the granting of credit lines with State guarantee.
Credit lines have the advantage of being less costly for the state but will cause excessive indebtedness and hamper economic recovery. Business owners excessively indebted people have little incentive to invest and create jobs, as future profits will be absorbed by debt service. In this context, some solutions can alleviate this problem, usually called “debt overhang”, which we can translate as “hangover from debt".
One solution is to capitalize companies through the creation of capitalization funds (with public capital and private) that inject liquidity in companies with objectives clear profitability, but for a limited time and without direct intervention management (the State does not have a specific good track record as a business manager). In contrast, capitalized companies must pay an IRC or VAT surcharge in the future (the state has a good track record as a tax collector) that allows the State to recover the investment.
This capitalization process should only be targeted at viable companies, assessed by independent entities, in sectors such as health, education, and digital transformation, as well as for exporting companies that can take advantage of geographical diversification of global value chains that will occur in the post-pandemic period. One should avoid all costs to create zombie companies that survive just because they have public support.
In the case of non-viable companies, the solution consists of adopting fast and efficient processes to deal with the giant wave of reorganizations and liquidations of companies rapidly approaching. Sectors such as tourism, leisure, and catering will inevitably have to shrink. The resources and the available human capital must be quickly reconverted and reallocated to other activity sectors with growth opportunities.
This content was originally written in Portuguese and published in Exame.
Miguel A. Ferreira holds the BPI | Fundação “la Caixa” Chair in Responsible Finance at Nova School of Business and Economics. He is the Dean of Faculty and Research at Nova School of Business and Economics. He is also a research associate of the European Corporate Governance Institute (ECGI) and a research fellow of the Centre for Economic Policy Research (CEPR)Website
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