COVID-19: guaranteed Loans and Zombie Firms

Area of Science:

• Business and Economics
• Crisis Management
• Public Policy

Background:

• COVID-19 crisis significantly impacted Swiss firms' business activities.
• Firms exhibited limited proactive responses, primarily decreasing operations.
• Declining foreign demand was identified as the primary driver of the economic downturn.

Purpose of the Study:

• To evaluate Swiss firms' reactions to the COVID-19 crisis.
• To analyze the impact of the Swiss federal loan program (Bundeshilfe) on business activities.
• To model the trade-offs faced by policymakers regarding financial aid.

Main Methods:

• Survey data collected from Swiss firms between April 7-13, 2020.
• Development of a theoretical model for financially constrained heterogeneous firms.
• Analysis of the economic effects of the federal loan program.

Main Results:

• Firms with pre-crisis difficulties were more severely affected.
• Low loan levels combined with demand shocks can increase unemployment.
• Excessive loan provision risks creating future 'zombie firms' and increasing public spending.

Conclusions:

• Policymakers must balance immediate employment concerns with long-term fiscal sustainability.
• The design of financial aid programs is critical to mitigate negative economic consequences.
• Understanding firm heterogeneity is key to effective crisis intervention.