Overall, we find that between 19% and 26% of EU non-financial corporations could face liquidity needs after a month of financial distress under the two alternative policy scenarios10. The proportion would reach 51% to 58% after three months. Trade and transportation, manufacturing (in particular production of chemicals, rubber and plastic, and transport equipment) and accommodation and food services would be the sectors most hit, while utilities, health, business activities, and IT would be more resilient.
At the level of the EU economy, the associated liquidity needs would range from EUR 16bn to 55bn after a month and EUR 112bn to 339bn after three. Those estimated needs look contained as a proportion of GDP. Following the crisis, corporate bankruptcies will inexorably rise. However, it is essential to circumvent bankruptcies due to short-term liquidity needs of corporates that have sound business prospects in normal times. This is key to maintain the productive capacity of the EU economy and therefore its post-crisis rebound. For this reason, in the European Union and the vast majority of its economies, specific policies have been developed to alleviate cash outflows and ensure that short-term credits continue flowing to companies during the economic freeze.
4. Many EU countries took measures to adapt insolvency law, such as the COVID-19 Bill adopted in Germany that includes a temporary suspension of both, the debtor’s statutory obligation to file for insolvency and the creditor’s right to request the opening of insolvency proceedings for insolvency reasons that occurred after 1 March 2020.
5. Equity products and grants (and perhaps even debt relief instruments) would not have the same pitfalls.
6. The sample is representative across all size groups and consists of 72% micro, 22% small, 5% medium and 1% large firms.
7. The ORBIS database is known to provide an imperfect sample of the EU economy, being biased towards manufacturing and with some economies, such as Germany, being under covered. At the same time, ORBIS is recognised to be the best existing covering source for EU non-financial corporate sector. It is widely used in empirical and academic studies.
8. Monthly expenses are derived from annualised balance sheet and income statements. They are obtained by dividing by 12 the annual expenses. Cash positions relate to 2017, the latest available information with good data coverage.
9. Other operating expenses comprise leasing, rent, marketing, accounting, administrative expenses, maintenance of machinery and all the services such as electricity, phone, insurance, that do not adjust much with activity in the short run.
10. Alternatively, by considering value added instead of number of firms, the proportion of firms facing liquidity shortage would range between 21% and 29% at the end of the first month and between 60% to 70% at the end of third month.