U.S. President Joe Biden speaks with Mike Siegel, co-owner of W.S. Jenks & Son, right, during a … [+]
Government support for small- and medium-sized businesses will be crucial to preventing a wave of insolvencies that could threaten a new wave of unemployment, according to new research from the International Monetary Fund.
The IMF says the share of businesses with negative equity is likely to rise 6 percentage points over 2020 and 2021, threatening up to 10% of jobs in small- and medium-sized enterprises.
“The pandemic is projected to boost the share of insolvent small and medium enterprises from 10 percent to 16 percent in 2021 across 20 mostly advanced economies in Europe and the Asia-Pacific region,” the Fund said.
“This increase is similar to that seen in the five years after the global financial crisis, but it would occur over a much shorter period. In a downside scenario with extended lockdowns and persistently weaker demand, the share of insolvent SMEs would rise by 8 percentage points.”
This would threaten some 13% to 21% percent of jobs at small- and medium-sized businesses, the Fund said.
Hardest skit sectors
The Fund also warns about the implications for bank debt exposures, particularly in Southern Europe.
“Rising small and medium enterprise insolvencies could trigger defaults and cause significant write-offs, depleting banks’ capital,” the IMF said.
The Fund recommends that “countries with adequate fiscal space, transparency, and accountability could consider quasi-equity injections into small and medium enterprises.”
In addition, it calls for expediting processes for business insolvency.
“Even with public support measures, small and medium enterprise insolvencies are likely to rise. Therefore, a comprehensive set of insolvency and debt restructuring tools will be needed for the insolvency proceedings system to cope with the added strain, the Fund said.
“These tools include dedicated out-of-court restructuring mechanisms, hybrid restructuring, and strengthened insolvency procedures—for instance, simplified reorganization for smaller firms.
A Federal Reserve survey of small businesses conducted by its regional district banks in February found that 64% of firms would apply for more government aid if it became available.
“Of these firms, 39% expected they would be unlikely to survive until sales return to ‘normal’ (that is, 2019 levels) without further government assistance,” the report said.
