IMF Urges 'Equity-Like' Government Support for Virus-Hit Firms

International Monetary Fund Chief Economist Gita Gopinath urged governments to shift to “equity-like” support from one focused on loans as the coronavirus pandemic inflicts prolonged damage on companies, Reuters reported. Gopinath said that the massive scale of the shock meant more firms will become insolvent as they suffer lower revenues for many months. Government support in the form of loans would saddle such companies with huge debt, which would serve like a tax that makes it difficult for them to emerge from the crisis, she said. “Because there’s a bigger insolvency issue here, government support would have to shift more towards being equity-like as opposed to debt-like. Otherwise, you would end up with a lot of firms that exit this crisis with a huge amount of debt over-hang,” she said. “If the lending takes form more like equity ... then that’s less onus on the firms. That will make it easier for firms to recover from the crisis,” Gopinath said. She did not elaborate on how such financing support would work. During its domestic banking crisis in the late 1990s, Japan injected capital into firms via schemes where state-affiliated bodies bought preferred shares issued by these firms. Read more.

 

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