A valuable recent contribution A Post-Coronavirus Recovery in Asia—Extending a “Whatever it Takes” Lifeline to Small Businesses in the IMF coronavirus blog by staffers Kenneth Kang and Changyong Rhee
Good to see a focus on the financing problems of small firms from the IMF — surely one of the main areas where policy action is needed. As IMF chief economist Gita Gopinath has put it in a contribution to the same blog series two weeks ago “This support should continue throughout the containment phase to minimize persistent scars that could emerge from subdued investment and job losses in this severe downturn.”
Some reactions of the detail of the Kang/ Rhee post. First I think there are two reasons why they are a bit too pessimistic about the fiscal costs of support to smaller businesses
- It is crucial to distinguish wages and salaries from other unavoidable costs – rent, debt servicing, minimal administrative operations to keep businesses alive, maintenance and security for buildings and other physical capital. In the UK wage costs dominate – accounting for more than 75% of the essential spending needed to keep businesses alive. IF the workforce can accept furlough on low (minimum wage?)) salary and if management accept temporary pay cuts, then the costs of ensuring business survival are substantially reduced.
- Insurance based thinking (from the outset of the crisis I have suggested that policy makers thing of this as a problem of a missing market, that of inadequate business interruption insurance, a framework which substantially helps with targeting support appropriately). The key I believe (and elaborate elsewhere in these pages) is that fiscal support should use first loss principals, going only to those small firms with relatively large revenue losses; and that this support should be scaled in proportion to their lost revenue.
Second Kang/ Rhee explore the possibility of a “special purpose vehicle” SPV where banks take the first loss on lending (so they still have ‘skin in the game’) and government equity holding can then support substantial central bank financing. I agree to an extent.
- Sales to an SPV are a part of the US payment protection program (modeled as it is on a pre-existing small business lending arrangements). Such SPVs are obviously important to support non-bank lenders e.g. “market place lenders” to be involved in this lending. ABS created by banks out of government supported loans should be acceptable as collateral for central bank liquidity provision. But skin in the game is a tricky one — since this also means extensive credit checks and will slow down the provision of emergency finance to prevent immediate business failures.
- Skin in the game and pubic-private risk sharing will I think be crucial going forward, as a tool for framing support to smaller business as we look to recovery in 2021. Banks and non-bank lenders will have to be the arbiters of which small businesses will still be viable in the much changed post-pandemic economy, distinguishing them from those that will, eventually, have to close. Skin in the game will then be essential. But so will state financial support. This SPV arrangement could then be very valuable for both bank and non-bank lending.