he situation we are in, is novel due to the nature and scale of the threat of COVID-19, which distinguishes it from any other crisis. It is unprecedented and therefore, we have no experience on how to deal with its consequences. The disruption is unfolding faster than some governments and organisations can understand or interpret using the usual approaches to emergencies.
The COVID-19 crisis bears none of the characteristics of the 2008 / 9 financial crisis and therefore the economic measures and solutions adopted then cannot be used now. It is likely to be a bigger economic threat than the financial crisis of 2008 /9 and may therefore persist for longer. It is a time when the operational and financial resilience of companies are severely tested and where, without the right financial aid packages, only the fittest are likely to reopen for business after COVID-19 is eventually conquered.
The main difference between this crisis and the 2009 / 9 financial crisis is that large-scale quarantines, travel restrictions and social distancing kill both supply and demand and therefore the supply of income – the lifeblood of every business. Because the crisis has no known time horizon, supply chains are likely to remain impaired for long.
Without income, no enterprise is sustainable. When income ceases or reduces significantly, companies have three options
· To borrow
. To cease operations or
· Implement severe cost cutting measures that will invariably include redundancies.
Ultimately, it is companies not governments or EU institutions that create jobs and jobs are not guaranteed by unions or by legislation.
Jobs are guaranteed by how well the economy performs. They are guaranteed by how well companies do.
Contrary to what many may think, and as Banks very well know, the majority of small to medium sized businesses in Malta do not have any significant cash reserves. Certainly not anywhere near what is needed in these unprecedented and uncertain times. This means that most businesses will soon be running out of money.
The interest free postponement of certain tax payments are indeed important measures as these alleviate imminent cash flow and liquidity concerns that businesses will certainly face. It is the insolvency risk that needs to be addressed and not just the liquidity risk.
Soft loans and loan guarantees are far less effective. Loans have to be repaid. Economist Martin Wolf argues that businesses will take up loans only to ensure their survival through the crisis.
Loans are appropriate to pay for stock that is on order or being delivered and for other commitments but “not necessarily to pay their workers”. On the other hand, economists, Emmanuel Saez and Gabriel Zucman argue, “loans do not compensate businesses and workers for their losses but just allow them to smooth costs over a longer time horizon”.
The theory that is being promulgated by Wolf, Saez and Zucman is that in such critical times, governments must become the spenders of last resort. In an economy that is mainly driven by internal consumer demand, government must take the role of the consumer and replace the demand.
These learned economists argue that this is the only way that governments can insure against the solvency of many businesses.
“Government can prevent a very sharp but short recession becoming a long-lasting depression.”
This should be done by increasing long-term government debt through higher long-term borrowing, the cost of which has plummeted. The money raised will be passed on to businesses through various measures and incentives foremost of which must be the retention of employees and the solvency of the business.
Saez and Zucman state “in the context of this pandemic, we need a new form of social insurance, one that directly helps workers and businesses. The most direct way to provide this insurance is to have the government act as a payer of last resort, so that hibernating businesses can keep paying their workers (instead of laying them off) and paying their necessary bills (instead of going bankrupt).
Business activity is on hold today but with an intravenous cash flow, it can be kept alive until the health crisis is over.
Absent government actions, will create large losses for businesses and will lead to mass layoffs. Many businesses and workers do not have enough liquidity to weather dramatic shortfalls in demand. The risk is that many businesses liquidate, severely affecting workers’ families.
In the case of the coronavirus crisis, it makes sense for the government to compensate businesses and workers for their losses through social insurance. Each business can then re-emerge almost intact, after the hibernation due to social distancing ends, rather than loaded with a heavy coronavirus debt burden."
In George Harisson’s words “All things Must Pass” but in the meantime it would not be amiss to remember that the coffers of every government are lined by businesses and every government is a silent partner in every private business. Governments should do whatever it takes to ensure that businesses survive this crisis and workers are not made redundant.