Various countries have given financial aid to the private sector in recent months, including extending credit and grants to companies.
Mass unemployment, bankruptcies and other potential shocks could hit the richest but supporters of tax reform say they should still shoulder more of the burden. Governments and central bankers rightly fight the effects of recessions on citizens – this year’s cash payments to American workers would be an example – but recessions are often necessary corrections to over-exuberance in business.So while the pandemic is very unusual, in one sense we must view it like any recession.
Another option would be to let vulnerable companies work themselves out in the normal bankruptcy reorganisation process . Some have tried to make the same argument about Virgin Atlantic being too big to fail today. A look at the financials suggests the UK government was likely correct to initially reject its request for £500 million in state aid, especially as Virgin had not tried to seek investments from other sources.
One country that has some protection against zombie firms is Germany. Before a company can receive funding from state-owned German bank KfW, the authorities must be satisfied that it was in solid shape before the crisis. This could be a useful model for other countries.
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