November 27, 2021


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Loan guarantees and their implications for post-Covid-19 productivity

From hibernation to reallocation: Loan assures and their implications for put up-Covid-19 productivity

Many international locations released or ramped-up warranty techniques to bridge liquidity shortages as a essential ingredient of the policy response to the Covid-19 disaster (Gobbi et al. 2020, Schivardi and Romano 2020). Governments raised the funding available for assure programmes (guaranteed loans far more than doubled for the median OECD state), amplified the level of the warranty on credit score, extended the protection to a broader variety of firms, and simplified the administrative methods to obtain the techniques (OECD 2020).

Despite their relevance, empirical proof on the part of bank loan promise programmes through the disaster in assuaging agency distress, as properly as their broader impact on productiveness via reallocation, is scarce. Our new paper (Demmou and Franco 2021) fills this gap by wanting both at their potential shorter-time period and medium-expression consequences.

Hibernation or zombification: Outcomes in the small term and the medium expression

The disaster might have cleaning or scarring consequences on productiveness via the extensive margin. Depending on the style of firms saved in excess of the efficiency distribution, personal loan ensures modify the industry collection procedure, therefore aggregating productivity functionality in the brief phrase. Centered on (1) a simulation product (2) a big sample of SMEs found in 14 European international locations and (3) a thorough sector-precise shock to companies revenues, we show that mortgage guarantees played a vital role in bridging the huge liquidity gaps involved with the Covid-19 shock and investigate the (pre-crisis) efficiency profile of illiquid companies as opposed with other companies in the sample.

Our conclusions display that the Covid-19 crisis experienced the potential to significantly hamper the effectiveness of industry variety mechanism by pushing numerous significant productivity firms out of the market place. As proven in Panel A of Figure 1, Covid-19 substantially elevated the likelihood of fiscal troubles across the total distribution of organization-degree productivity: the red line (Covid-19, absent policy support state of affairs) is regularly higher than the blue line (usual times). But the blend of conventional procedures and financial loan promise strategies counteracted this approach by hibernating the corporate sector and realigning the sector selection system nearer to normal time benchmarks (orange line), primarily for medium- and higher-productivity firms (the leading 75% of the efficiency distribution). 

This desirable end result is reached at the price of slightly ‘over-reducing’ the probability of illiquidity of lower-productiveness firms (the bottom 25% of the efficiency distribution). But, back again-of-the-envelope simulations trace that only a modest share of the corporations turning liquid owing to loan ensures could be classified as zombies (in between 4-8%) – zombie lending has perhaps been confined for the duration of the initially calendar year of the pandemic. All round, these results are in line with a developing overall body of investigation investigating the probable scarring effects of the Covid-19 and the hibernation position of insurance policies (Andrews et al. 2021, Barnes et al. 2021, Benassy-Queré et al. 2021, Bighelli et al. 2021, Cœuré 2021, Cros et al. 2021).

At the same time, nevertheless, huge mortgage assurance programmes do not appear without risks for upcoming productivity. Checking out the historic romantic relationship involving the dimensions of loan guarantee programmes and dynamic allocative effectiveness in ten OECD nations around the world, we display that these schemes may possibly favour the construct-up of misallocation in the medium time period, as sizeable programmes are correlated with a slowdown in the potential of most successful corporations to bring in much more labour and develop quicker (Panel B of Figure 1).1 For instance, when our final results do not indicate causation, a substantial boost in the mortgage guarantees to GDP ratio of one particular percentage point appears related with a decrease in the performance of labour reallocation of 1 tenth. 

This regular relationship masks suitable heterogeneities. The consequences of loan guarantees on reallocation ended up identified to be far more benign in intangible-intense sectors and even favourable for smaller sized-scale programmes, underscoring their probable to ease fiscal constraints and increasing the prospect that delimited guaranteed credit history programmes may well assist foster the development of successful firms.

Determine 1 Credit rating assures have contributed decisively to restore COVID-19-induced inefficiency in current market assortment, but significant programmes may well hamper allocative effectiveness in the medium-time period

Notice: Panel A demonstrates the predicted probability to convert illiquid at different efficiency levels in 4 distinctive scenarios: No-COVID (blue line) COVID-19 without the need of policy intervention (pink line) COVID-19 with position retention techniques, financial debt moratorium and tax moratorium (environmentally friendly line) COVID-19 with loan assures in addition to the other guidelines (orange line). The shaded areas all around the strains signify 95% self-assurance intervals. Productivity is measured as the log of pre-crisis organization-degree multi-issue efficiency. Dependent on an investigation covering the 2007-2018 period of time, Panel B demonstrates the affect of an raise of the certain financial loans to GDP ratio on the correlation concerning efficiency and work advancement.
Source: OECD calculations dependent on Orbis® and OECD facts. 

Plan implications

At a glance, the empirical investigation exhibits that the value of withdrawing help could outweigh the positive aspects in the small expression, whilst the reverse may well keep when the overall economy turns back again to its pre-disaster degrees. We argue that an helpful exit strategy could aim at preserving the benefits realized as a result of help packages when reducing their disadvantages.

To cut down concerns of a likely collapse of credit history flows adhering to a premature withdrawal, policymakers could take into consideration a gradual and state-contingent strategy to phasing out personal loan assurance schemes and other pandemic-associated support:

  • Viable corporations in challenging-hit sectors and SMEs not immediately benefitting from the worldwide restoration may perhaps have to have ongoing liquidity assistance. Loan guarantee techniques could also be temporarily frozen at the time liquidity demands diminish, but specific arrangements to relieve their reactivation could assist to stay clear of cumbersome legislative procedures or sunk operational prices if the plan requirements to be restarted later on (FSB 2021).
  • Still, to be certain that the additional support does not induce a materials misallocation of methods in excess of the medium-to-for a longer period operate, bank loan ensure strategies may well have to have to be high-quality-tuned and further qualified. For instance, redesigning the key covenants of the financial loans (e.g. part of the mortgage backed by the govt warranty or a price to entry the programmes) would diminish the hazard of moral hazard and adverse range. 

The shock could even now translate into a wave of corporate insolvencies and the reliance on credit history assures could have increased firms’ indebtedness, major to credit card debt overhang. To countervail these threats, it is vital to:

  • privilege grants and quasi-fairness sort of devices to guidance the company sector, e.g. linking financial loans reimbursement to businesses’ returns or changing federal government loans into grants (up to a ceiling and for certain operational expenditures) and
  • build the disorders to encourage early financial debt restructuring, e.g. by means of a bolstered community of consultations involving stakeholders or incentives for financial institutions to restructure.

At last, as pandemic-connected aid is phased out, dynamism-enhancing structural reforms could be prioritised. In distinct:

  • Boosting firms’ entry is a main challenge for absorbing displaced personnel from upcoming bankruptcies, as it would allow harnessing the gains of the creative-destruction method although decreasing its social charges.
  • It is critical to make sure the diffusion and uptake of electronic technologies across all levels of the company sector, as digitalisation grew to become a subject of survival for quite a few companies in Covid-19 situations, shaping not only productiveness but also macroeconomic resilience.


Andrews, D, A Charlton and A Moore (2021), “Covid-19 and the continued labour reallocation to productive and tech-savvy firms”,, 22 September.

Barnes, S, R Hillman, G Wharf and D MacDonald (2021), “How corporations are surviving Covid-19: The resilience of firms and the part of federal government support”,, 16 July.

Bénassy-Quéré, A, B Hadjibeyli and G Roulleau (2021), “French corporations by the COVID storm: Evidence from business-amount data”,, 27 April.

Bighelli, T, T Lalinsky and F di Mauro (2021), “Covid-19 government help might have not been as unproductively dispersed as feared”,, 19 August.

Cœuré, B (2021), “What 3.5 million French companies can inform us about the effectiveness of Covid-19 aid measures”,, 8 September. 

Cros, M, A Epaulard and P Martin (2021), “Will Schumpeter capture COVID-19? Proof from France”,, 4 March.

Demmou, L and G Franco (2021), “From hibernation to reallocation: bank loan assures and their implications for article-COVID-19 productivity”, OECD Economics Division Doing the job Papers 1687, OECD Publishing, Paris.

FSB (2021), “Covid-19 aid actions: Extending, amending and ending”, Economical Steadiness Board.

Gobbi, G, F Palazzo and A Segura (2020), “Unintended outcomes of mortgage assures throughout the Covid-19 crisis”,, 15 April.

OECD (2020), “Coronavirus (COVID-19): SME policy responses”, OECD Policy Responses to Coronavirus (COVID-19), OECD Publishing, Paris.

Schivardi, F and G Romano (2020), “Liquidity crisis: Holding companies afloat in the course of Covid-19”,, 18 July.


1 It is worth stressing yet again that the analysis focuses on the productiveness impacts by way of reallocation. Significant programmes might also be general performance-enhancing by way of channels other than reallocation which are not investigated in this study – for instance by spurring within firm productivity, if bank loan guarantees supply added methods (not accessible or else) that foster firms’ financial commitment.