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Throwing a COVID-19 liquidity life-line
Posted by Markus K Brunnermeier on 19 March 2020
Debate: Economics in the Time of Covid-19
By Markus Brunnermeier, Jean-Pierre Landau, Marco Pagano, and Ricardo Reis
Effective economic policies are urgently required to deal with the enormous strain that the global epidemic is putting on all of the EU members’ economies. Right away, a key dimension in which the EU can help is in overcoming the liquidity shortages for firms that are facing a temporary yet dramatic drop in their revenues. This is essential if they are to keep on:
Providing the necessary liquidity could be done with a Euro-wide scheme that provides direct funding on a large scale and with urgency – ideally, in a few weeks. We envision a scheme in which the European Investment Bank (EIB) borrows from the ECB, and extends loans at a favourable interest rate to firms strapped for cash. The national tax authorities would then, over a period of a few years ,collect the revenues to recover the loan and pay back the EIB. Specifically, we envisage the following steps:
Why not channel these loans via banks? The scheme greatly helps the banks, since it allows firms to repay in full their debts on current outstanding loans. Hence, this scheme will reduce non-performing loans and help stabilise banks. At the same time, the direct nature of the funding scheme avoids intermediation by banks. This guarantees that the money will flow directly to firms in all the EU member states, irrespective of the health and efficiency of national banking systems. Moreover, since the crisis in the short run is hitting firms and their payments directly, rather than banks, it makes sense to target the funding scheme to firms directly. Of course, banks, consumers, and all others economic agents will benefit from preventing the widespread failure of firms.
Why do this at the European rather than at the national level? There are good economic and political reasons to do so: