Germany Will Be a Post-Coronavirus Winner
— April 9, 2020
By Marti Subrahmanyam, Elena Carletti, Marco Pagano and Loriana Pelizzon
Today, many businesses have seen their revenues almost vanish and, therefore, find themselves in a severe cash crunch. Various proposals have been put forward to funnel money to businesses before they’re forced to lay off employees, cancel their supplies, and close their doors. One of these proposals is to have the European Investment Bank — the European Union’s lending arm — provide a liquidity lifeline to the continent’s firms, in the form of immediate, massive funding at zero interest to enable companies to meet their expiring debt obligations, with backup funding provided by the European Central Bank.
This is a step in the right direction, but it’s not enough by itself: It keeps the patient on life support, but doesn’t let them recover. Indeed, as liquidity reaches companies through loans, it increases their leverage through greater debt and, therefore, their default risk, leaving them with little room to invest and grow. Growth, which has already been low for a long time in most of the euro zone, especially in Italy, will slow even further if its businesses run out of equity capital after the crisis because of the sharp rise in indebtedness.
Read the full Bloomberg article.
Marti Subrahmanyam is the Charles E. Merrill Professor of Finance, Economics and International Business