Coming as a massive shock to the world economy, the COVID-19 pandemic has triggered an unprecedented policy response. This response has softened the economic impact of the crisis and kept many businesses afloat. With macroeconomic policies already stretched, many observers now call for a more targeted and sustainable approach. Will this policy normalization lead to a wave of corporate bankruptcies, which has so far not materialized? What should be done to avoid the emergence of zombie firms? What should be the role of financial sector regulation and supervision? Are bankruptcy frameworks robust enough to help winnow unviable from salvageable enterprises? And how are countries in the JVI region dealing with these issues in practice?
OeNB Governor Holzmann opened the discussion by noting a paradoxical situation: despite an initial collapse of economic activity and severe mobility restrictions, the number of corporate insolvencies has fallen significantly in Austria; a similar situation is observed throughout the CESEE region. Governor Angelovska Bezhoska (National Bank of the Republic of North Macedonia) confirmed similar trends regarding corporate insolvencies in North Macedonia and in the Western Balkans, with no significant effects of the collapse of economic activity on financial stability so far. ECB Director General Laeven and the IMF Deputy General Counsel Liu also noted that similar trends are present in the euro area and globally.
Panelists agreed that the counterintuitive fall in corporate insolvencies was a reflection of the unprecedented range and intensity of policy support measures undertaken in response to the pandemic outbreak in spring 2020. For instance, Mr. Holzmann highlighted waivers for the obligation to file bankruptcy, government grants and subsidies, as well as loan repayment moratoria as key measures that prevented a rise in bankruptcies in CESEE EU member states in 2020. Director General Waiglein from the Austrian Ministry of Finance also noted that the Austrian fiscal stimulus, one of the largest in the EU, was essential in keeping corporate bankruptcies under control. Ms. Angelovska Bezhoska added that adverse effects on corporate balance sheets were prevented due to the accommodative monetary policy stance (record low interest rates, and sometimes unconventional monetary policy measures), and even more so due to large fiscal support packages. Financial sector policies, debt moratoria and the postponement of insolvency procedure initiation also played an essential role.
While agreeing that this crisis is different, several panelists drew important parallels with previous crises. Ms. Liu noted that besides the unprecedented policy response, what is different now is that corporate debt was already high before the start of the pandemic. She thus argued that, while the number of insolvencies is falling now, risks are building up, as the corporate sector is becoming even more indebted. In addition, there are significant differences compared to previous crises with regard to the sectors that are most affected, as well as the company size. For instance, it appears that SMEs are particularly badly hit, both because of weaker access to finance and because of their concentration in contact-intensive sectors. Ms. Liu underscored that a swift withdrawal of policy support would likely result in a wave of corporate insolvencies, but continued broad support to the corporate sector could lead to a rising number of zombie firms. Mr. Laeven made a comparison with the situation in Japan in the early 1990s. In his view, the likelihood of a proliferation of zombie firms in the euro area now is much lower, due to several important differences. Firstly, the situation in Japan reflected a massive misallocation of resources and a real estate bubble, with banks often continuing credit support because of their equity stakes in companies. Secondly, the response by governments and central banks now prevented a liquidity squeeze turning into a solvency crisis. He argued that important lessons from Japan and also the Global Financial Crisis were learnt, with banks now having more solid capital positions and generally not holding significant equity in companies.
Like other panelists, Mr. Waiglein emphasized the concerns related to the withdrawal of support in the period ahead. He noted the strong corporate performance in Austria in recent months, with profitability back to pre-pandemic levels. However, he argued that some sectors are still affected, and will probably face problems in the period ahead, most notably tourism and hospitality. On this point, panelists agreed that future policies should move away from broad-based to targeted support, which should ideally look at individual companies. Several panelists agreed on the importance of updated and reformed insolvency frameworks, for instance along the lines of the 2019 European Directive on restructuring and insolvency. However, Mr. Laeven warned that the big question is where the jobs of the future will be, and that legal institutions are not best placed to answer this question. Instead, governments should address this issue, for example by preparing workers to move to new sectors. Mr. Waiglein also commented on the new EU directive, noting that while it addresses some important issues, its implementation is not straightforward. He also noted that while government investment in equity is a possible form of public sector support, it may not be feasible in many cases, due to capacity constraints in the public sector. Ms. Liu echoed this by noting that assessing viability in the middle of a pandemic is much easier said than done. However, this remains a critical precondition to efficient public support and to avoid overwhelming the court system. Finally, Ms. Angelovska Bezhoska commented that the macroeconomic policy space for further support is now limited, with policy rates at a historical low and public debt at historically high levels.
Ms. Jones, the panel moderator, concluded by congratulating policymakers for a swift and effective response to the crisis and stressed the need to remain vigilant, as the crisis is not over yet.
Rilind Kabashi, Economist, JVI
