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Mr. Christian H Ebeke, Nemanja Jovanovic, Ms. Laura Valderrama, and Jing Zhou
The spread of COVID-19, containment measures, and general uncertainty led to a sharp reduction in activity in the first half of 2020. Europe was hit particularly hard—the economic contraction in 2020 is estimated to have been among the largest in the world—with potentially severe repercussions on its nonfinancial corporations. A wave of corporate bankruptcies would generate mass unemployment, and a loss of productive capacity and firm-specific human capital. With many SMEs in Europe relying primarily on the banking sector for external finance, stress in the corporate sector could easily translate into pressures in the banking system (Aiyar et al., forthcoming).
International Monetary Fund. External Relations Dept.

: What are the policy implications? M umssen: It is safe to say that the federal and local governments, and all state-owned enterprises, have no business collecting noncash revenues. But enterprises’ liquidity problems were hard to avoid at the beginning of transition. There was a strong negative demand shock, and thus a natural process whereby loss-making illiquid firms eventually closed down or restructured radically. Firms in those circumstances would temporarily resort to arrears and, possibly, to noncash transactions. We would not advise any government to

International Monetary Fund. European Dept.
The ability of the National Bank of Belgium (NBB) to provide emergency liquidity assistance to solvent but temporarily illiquid firms is well tested and satisfactory. Belgian authorities are testing draft guidelines for recovery plans through pilot projects with selected firms that are of systemic importance. Introducing recurrent crisis management simulations would allow the authorities to test the coordination arrangements and potential application of the crisis management toolkit. It is commended that the NBB can enhance the framework for orderly and effective resolution.
International Monetary Fund. European Dept.

duration of support measures, while duly taking into consideration possible negative side effects . As staff writes, due to the extraordinary effects of COVID-19, some firms may be viable but illiquid right now. However, given the high uncertainty it is very difficult to assess that in the current environment. It would not be in the public interest to let generally viable but momentarily illiquid firms go out of business – which could also have negative effects on the financial sector – although support measures will be phased out in a gradual and well-sequenced manner

Chang Yong Rhee and Katsiaryna Svirydzenka

only viable firms with liquidity shortages. Over time, the emergency support measures aimed at preventing initial mass bankruptcies should be regularly adjusted in size and scope to ensure only viable but illiquid firms are supported. Subsidies for the most-affected industries should gradually transition toward new growth industries, such as those involving digitalization or climate change mitigation technologies. Prepare for an orderly phasing-out of exceptional support measures. Considering the magnitude of the crisis, unwinding the initial public interventions