In the first phase, the crisis generated a significant decline in firms’ revenues relative to fixed costs (such as supplies, rentals, labour costs) that led to an increase in firms’ liquidity needs on top of those derived from the amortisation of pre-existing debt. In turn, this raised the risk that some of these corporates would not be able to meet their payment obligations (liquidity risk) together with a non-negligible probability of negative spillovers to other companies. The decisive and forceful action of economic policies has helped mitigate this risk to a great extent, so that a large proportion of these firms with liquidity needs were able to cover them. Key measures included, for example, furlough schemes that help to alleviate fix costs, and also public guarantees for business financing that have allowed for the liquidity needs to be financed. However, as the crisis unfolds, concern is shifting from liquidity risk to the deterioration of the solvency position of firms, associated with the combination of higher levels of debt as a result of the crisis with still low profitability expectations for the coming quarters, especially in sectors most impacted by the crisis and irrespective of whether these firms are viable in the long term. And this situation leads to the following two related concerns. First, it is obvious that it increases the probability of defaults which could lead to viable firms going out of business, thus making the costs of the crisis deeper and protracted.
Pablo Hernández de Cos: How to preserve pandemic-struck viable firms for a stronger recovery Introductory remarks by Mr Pablo Hernández de Cos, Governor of the Bank of Spain and Chair of the Basel Committee on Banking Supervision, at the European Systemic Risk Board (ESRB) virtual seminar on “Corporate insolvencies and public support measures”, 29 April 2021. * * * Many thanks to the ESRB Secretariat for organising this seminar. And let me also thank and welcome all participants to this event. I will devote these brief opening remarks to outline why, at the ESRB, we consider the topic of the seminar “Corporate insolvencies and public support measures” a very relevant and timely one. The starting point is our perception that, in the context of the current crisis, even if the macrofinancial outlook has improved, uncertainty remains high. And one of the main elements of this uncertainty is precisely related to the extent of the damage inflicted by the crisis on the corporate sector, whose magnitude will be a key determinant of the persistence of the crisis and the strength of the economic recovery. Therefore, we need to measure this risk carefully and be ready to adapt our policies to mitigate it to the extent possible. And this is particularly relevant in the current phase of the crisis.