ABSTRACT
This paper assesses corporate financial distress in terms of liquidity and risk of insolvency due to the COVID-19 pandemic. We develop a novel multivariate approach to obtain monthly data on industry turnover, exploiting real time data to capture the atypical character of industry-specific disturbances. By combining the estimated set of industry revenue shocks with pre-pandemic financial statements, we quantify the impact of the pandemic on the risk of insolvency in the EU non-financial corporate sector. Our definition of risk of insolvency takes into account not only the equity position of firms, but also risks relating to overindebtedness. The analysis controls for firms that were financially vulnerable already before the pandemic, thus being prone to become at risk of insolvency also in absence of the COVID-19 turmoil. We find that, for the EU as a whole, 25% of firms exhausted their liquidity buffers by the end of 2021 (a practical cut-off date of the analysis, not an assumed end of the pandemic). Furthermore, 10% of firms which were viable before the pandemic, appear to have shifted into risk of insolvency as a result of the COVID-19 crisis. The magnification of financial vulnerability in the hardest-hit industries mainly occurs among firms with no legacy issues, i.e. firms with positive profitability pre-pandemic. A similar finding is reported for some of the hardest-hit countries, such as Italy and Spain. In other countries, such as Germany or Greece, the magnification of financial vulnerability mainly occurs among firms with negative profitability pre-pandemic.
ABSTRACT
The debate about the use of fiscal instruments for macroeconomic stabilization has regained prominence in the aftermath of the Great Recession, and its relevance has suddenly increased further, after the recent Covid-19 shock. The analysis of fiscal stabilization in the United States, a monetary union equipped with a common fiscal capacity, has often informed the literature on the European EMU and could serve as a reference for its possible future reforms. This paper expands that literature in three ways: first, by measuring stabilization not only as inter-state risk-sharing of asymmetric shocks, but also as intertemporal stabilization of common shocks;second, by doing this for specific items in the US federal budget, both on the revenue and on the expenditure side;and third, by also measuring the impact of the federal system of unemployment benefits and of its extension as a response to the Great Recession. Corporate and personal income tax, on the revenue side, and social security benefits and federal grants, on the spending side, are the most effective items. The US federal system of unemployment insurance provides great stabilization in the event of a large shock, in particular when enhanced by the discretionary program of extended benefits. These findings imply that a proper design of the budget can maximize its stabilization effect, when it helps bridging the gap between higher mobility of capital and lower mobility of labor, by collecting revenues based on the income of the most mobile factor (corporate income tax) and providing support to the income of the least mobile factor (social security).
ABSTRACT
The debate about the use of fiscal instruments for macroeconomic stabilization has regained prominence in the aftermath of the Great Recession, and its relevance has suddenly increased further, after the recent Covid-19 shock. The analysis of fiscal stabilization in the United States, a monetary union equipped with a common fiscal capacity, has often informed the literature on the European EMU and could serve as a reference for its possible future reforms. This paper expands that literature in three ways: first, by measuring stabilization not only as inter-state risk-sharing of asymmetric shocks, but also as intertemporal stabilization of common shocks;second, by doing this for specific items in the US federal budget, both on the revenue and on the expenditure side;and third, by also measuring the impact of the federal system of unemployment benefits and of its extension as a response to the Great Recession. Corporate and personal income tax, on the revenue side, and social security benefits and federal grants, on the spending side, are the most effective items. The US federal system of unemployment insurance provides great stabilization in the event of a large shock, in particular when enhanced by the discretionary program of extended benefits. These findings imply that a proper design of the budget can maximize its stabilization effect, when it helps bridging the gap between higher mobility of capital and lower mobility of labor, by collecting revenues based on the income of the most mobile factor (corporate income tax) and providing support to the income of the least mobile factor (social security).