Financial Constraints with the Outbreak of COVID-19 and the Equity Guarantee Swap

ABSTRACT

In order to further alleviate the financing constraints on SMEs and to reduce financing costs incurred following the outbreak of COVID-19, this article introduces an innovative financial arrangement called equity for guarantee swaps (EGS), which are based on widely used credit guarantee schemes (CGS). EGS can reduce information asymmetry and increase credit to SMEs, so that they can obtain more favorable financing conditions and alleviate liquidity difficulties. This helps to reverse the adverse impact of the pandemic. More importantly, from an academic perspective EGS demonstrate Pareto improvement over CGS.