From hibernation to reallocation: Loan guarantees and their implications for post-COVID-19
productivity
The paper analyses the role of loan guarantee programmes following the COVID-19 outbreak
in alleviating firm distress as well as their broader impacts on productivity via
reallocation, relying on a simulation model and econometric estimations. The simulation
exercise relies on a simple cash-flow accounting model, a large dataset reporting
balance sheets of firms located in 14 countries and granular data on the magnitude
of the COVID-19 shock. Our findings suggest that i) the COVID-19 shock had the potential
to seriously distort market selection; and ii) policy actions corrected up to 30%
of the inefficiency of market selection in the short-term, shielding many high productive
firms from distress and supporting zombie firms only to a limited extent. The econometric
exercise, based on historical data and standard models of dynamic allocative efficiency,
examines how loan guarantees may shape the efficiency through which resources are
allocated across firms of different productivity levels over the medium-term. Results
suggest that, over the 2007-2018 period, increases in large-scale loan guarantee schemes
were associated with weaker reallocation of credit and labour from low to high productivity
firms. However, these effects are found to be more benign in intangible-intensive
sectors and even positive for smaller scale programmes. Overall, engineering an effective
exit strategy from these schemes, preserving their benefits while reducing their drawbacks
through a gradual and state contingent phasing out, is critical to foster the recovery
of the corporate sector. Further, monitoring debt overhang risks and facilitating
firms’ entry and digital diffusion are relevant complementary challenges to address
once COVID-19 related support is withdrawn.
Published on November 04, 2021
In series:OECD Economics Department Working Papersview more titles