Lilas Demmou, Guido Franco, 14 November 2021

Loan guarantee programmes have played a key role in reducing Covid-related distortions to market selection, shielding many high-productivity firms and supporting zombie firms only to a limited extent. This column argues, however, that such schemes do not come without risks for future productivity, as sizeable programmes may favour the build-up of misallocation in the medium term. Engineering an effective exit strategy from these schemes – preserving their benefits while reducing their drawbacks – is critical to foster the recovery of the corporate sector.

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