A Restart Procedure to Deal with Covid-19

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Public Policy
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Public Policy
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Under Review

ABSTRACT

Governments around the world are assisting firms to deal with the adverse effects of Covid-19. Most forms of government assistance provided so far reduce firms’ operating costs. Firms’ debts keep accumulating, however, and the resulting debt overhang will be a drag on economic recovery. In this chapter we argue that policies are needed to restructure the debt of a large number of firms throughout the economy. We propose one such policy, which includes an extended bankruptcy stay, followed by a write-down of government claims on a firm conditionally on a comparable write-down agreed by the firm’s private creditors. Our procedure makes efficient use of fiscal resources, discourages healthy firms from claiming to be distressed, and can be combined with debt-equity swaps for large firms.