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Sebnem Kalemli-Ozcan, Pierre-Olivier Gourinchas, Veronika Penciakova, and Nick Sander
We estimate the impact of the COVID-19 crisis on business failures among small and medium size enterprises (SMEs) in seventeen countries using a large representative firm-level database. We use a simple model of firm cost-minimization and measure each firm’s liquidity shortfall during and after COVID-19. Our framework allows for a rich combination of sectoral and aggregate supply, productivity, and demand shocks. We estimate a large increase in the failure rate of SMEs under COVID-19 of nearly 9 percentage points, ab-sent government support. Accommodation & Food Services, Arts, Entertainment & Recreation, Education, and Other Services are among the most affected sectors. The jobs at risk due to COVID-19 related SME business failures represent 3.1 percent of private sector employment. Despite the large impact on business failures and employment, we estimate only moderate effects on the financial sector: the share of Non Performing Loans on bank balance sheets would increase by up to 11 percentage points, representing 0.3 percent of banks’ assets and resulting in a 0.75 percentage point decline in the common equity Tier-1 capital ratio. We evaluate the cost and effectiveness of various policy interventions. The fiscal cost of an intervention that narrowly targets at risk firms can be modest (0.54% of GDP). However, at a similar level of effectiveness, non-targeted subsidies can be substantially more expensive (1.82% of GDP). Our results have important implications for the severity of the COVID-19 recession, the design of policies, and the speed of the recovery.
Sebnem Kalemli-Ozcan, Pierre-Olivier Gourinchas, Veronika Penciakova, and Nick Sander

would have failed regardless of COVID-19 or that don’t need it. To explore this question further, we decompose SMEs into three groups: ‘survivor’ firms that don’t need support to weather the COVID-19 shock; ‘viable’ firms that would survive in normal times, but fail under COVID-19; and ‘ghostfirms that would fail regardless of COVID-19. The efficient targeted intervention only provides relief to the group of ‘viable’ firms. By contrast, the direct firm subsidy indexed to the wage bill directs only 0.18 percent of GDP (out of 1.82 percent) to ‘viable’ firms, while 1

Luis Franjo, Nathalie Pouokam, and Francesco Turino
In this paper we build a model of occupational choice with informal production and progressive income taxation. We calibrate the model to the Brazilian economy to evaluate the impact of removing financial frictions on informality. We find that financial deepening leads to a drop in the size of the informal sector (from 37 percent to 22 percent of official GDP), to an increase in measured TFP (by 4 percent), to an increase in official GDP (by 27 percent), to a decrease in tax evasion (by 17 percent) and to an increase in fiscal revenues (by 15 percent). When assessing the response of this policy at different levels of financial development, we find a non-linear relationship between the credit-to-GDP ratio on the one hand, and either the size of the informal economy, or GDP per capita on the other hand. We test these features with cross-country data and find evidence in favor of both types of non-linearity. We also investigate changes in the income tax progressitivity as an alternative policy and find it to be more effective in countries with a medium to high level of financial markets development.
Luis Franjo, Nathalie Pouokam, and Francesco Turino

provides several key statistics for both the benchmark and the perfect credit markets economy, and in Figure 2 that shows how individual decisions are affected by financial deepening in Brazil. Table 3: Experiment Results. Removing financial frictions Benchmark No financial frictions λ 1.37 ∞ Size informal economy 37.43% 22.97% Ghost firms (% Total firms) 74.59% 61.77% ΔInformal production -22.12% ΔFormal production (Official GDP) 26.91% ΔTotal production 12.72% ΔCapital 18

Luis Franjo, Nathalie Pouokam, and Francesco Turino
Sebnem Kalemli-Ozcan, Pierre-Olivier Gourinchas, Veronika Penciakova, and Nick Sander
Mr. Thierry Tressel and Xiaodan Ding

regarding needs of liquidity support (needed both for “survivors” and “viable” firms), debt restructuring (required for “viable” firms), and liquidations (of “ghostfirms). Making use of our forward-looking stress test simulations, we offer quantifications of this triage of firms under the baseline and the adverse scenario. We show that, while by and large, firms will overcome the pandemic shock well under the scenarios considered, the stock of debt requiring some restructuring or among firms to be liquidated may be quantitatively significant in the medium-term. Moreover

Mr. Thierry Tressel and Xiaodan Ding
Corporate sector vulnerabilities have been a central policy topic since the outset of the COVID-19 pandemic. In this paper, we analyze some 17,000 publicly listed firms in a sample of 24 countries, and assess their ability to withstand shocks induced by the pandemic to their liquidity, viability and solvency. For this purpose, we develop novel multi-factor sensitivity analysis and dynamic scenario-based stress test techniques to assess the impact of shocks on firm’s ability to service their debt, and on their liquidity and solvency positions. Applying the October 2020 WEO baseline and adverse scenarios, we find that a large share of publicly-listed firms become vulnerable as a result of the pandemic shock and additional borrowing needs to overcome cash shortfalls are large, while firm behavioral responses and policies substantially help overcome the impact of the shock in the near term. Looking forward, while interest coverage ratios tend to improve over time after the initial shock as earnings recover in line with projected macroeconomic conditions, liquidity needs remain substantial in many firms across countries and across industries, while insolvencies rise over time in specific industries. To inform policy debates, we offer an approach to a triage between viable and unviable firms, and find that the needs for liquidity support of viable firms remain important beyond 2020, and that medium-term debt restructuring needs and liquidations of firms may be substantial in the medium-term.