1  See, for example: S. C. Myers (1977), “Determinants of Corporate Borrowing”, Journal of Financial Economics, 5 (2), pp. 147–175; S. Kalemli-Ozcan, L. Laeven and D. Moreno (2019), “Debt Overhang, Rollover Risk, and Corporate Investment: Evidence from the European Crisis”, ECB Working Paper No 2241; and T. Philippon (2010), “Debt Overhang and Recapitalization in Closed and Open Economies”, IMF Economic Review, Palgrave Macmillan, IMF, Vol. 58(1), pp. 157-178, August. 2 The Banco de España’s scenario 1 published in September envisaged quarter-on-quarter growth of 3.9% in 2020 Q4 and of 1% in 2021 Q1. 1  In this setting, and considering the potential news flow on a possible vaccine, economic policy should focus on continuing to provide support for households and firms affected by the crisis. The liquidity risks facing firms and the economic policies applied to address them  Let me now analyse the main financial risks that firms face in such a challenging environment. The two key risks are liquidity and solvency. The shock has given rise to a sharp fall in firms’ revenues, as a result not only of the pandemic itself but also of the mobility-restricting measures introduced by the authorities to stop the spread of the virus. This contraction in firms’ turnover, together with their fixed costs, has driven up firms’ liquidity needs. Firms were able to use their liquid assets or undrawn credit lines to meet part of these needs. But given the scale of the shock, in many cases these buffers proved insufficient.
In consequence, to meet their remaining liquidity needs, firms sought new funding. The result has been an increase in the demand for credit, in a setting in which lenders’ risk perception has increased. According to the results of microsimulations made by the Banco de España, 68% of Spanish firms will record liquidity shortfalls3 in 2020, almost 10 pp more than under a counterfactual non-pandemic scenario.4  3  The definition used here considers that a firm has a liquidity shortfall when its cash inflows, deriving essentially from sales of products or services, are lower than the payments relating to its activity (supplies, rentals, financial expenses and personnel costs) and those resulting from its investment in fixed assets and its debt repayments. 4 See R. Blanco, S. Mayordomo, A. Menéndez and M. Mulino (2020), Spanish non-financial corporations’ liquidity needs and solvency after the COVID-19 shock; Occasional Paper No 2020, Banco de España. 2  It is estimated that between 2020 Q2 and Q4, the total liquidity shortfall of the business sector will amount to some € billion, € billion more than under the counterfactual nonpandemic scenario if no account is taken of the liquidity needs associated with investment in fixed assets. Firms’ liquid assets and undrawn credit lines would be insufficient to cover more than half these liquidity needs. These simulations also show that a large part of firms’ total liquidity needs would arise at low-credit-quality firms.