Credit, Employment, and the COVID Crisis

Pandemic-motivated lockdowns can expose firms to a vicious cycle: they cannot borrow enough to keep paying wages and are forced to dismiss workers; the dismissal of workers in turn reduces future productivity, sales, and profits; and those bleak prospects are precisely what keeps firms from being able to borrow in the first place. To prevent this cycle, a robust policy intervention is called for. In response to COVID-19, debt finance —including subsidized credit programs, debt relief and credit guarantees— has accounted for a sizeable share of the relief measures aimed at firms. Preliminary macro evidence suggests that these programmes are having an impact: the size of liquidity support policies is positively correlated with the extent of credit expansion, firm value, employment and GDP. Micro-economic data for a number of countries points in the same direction: financial support programs for firms can be effective at preventing job losses during and after a pandemic.