Biggest Crisis Test Is Still to Come With Insolvencies, BIS Says

Policy makers are facing the most economically challenging part of the Covid-19 crisis in avoiding the creation of “zombie” companies, according to the Bank for International Settlements.

Ultra-easy monetary and fiscal support is helping companies avoid a liquidity crunch after the pandemic closed down businesses and demand collapsed. But that stance bears risks longer-term, said Claudio Borio, head of the Basel-based institutions Monetary and Economic Department.

“Theres a delicate balance to be struck between on the one hand withdrawing it too early, which will obliviously have short-term costs in terms of economic activity, and withdrawing it too late, which will mean that it will not favor necessary structural adjustments,” he said on Monday.

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Officials in Europe and the U.S. have unleashed unprecedented easing in response to the Covid-19 outbreak, which has pushed up equity markets even as economies face their deepest recession in decades.

While the liquidity measures have helped companies stay afloat, there are concerns they may also be creating a swathe of uncompetitive firms that hold back investment and innovation.

“The real challenge is to distinguish between viable and non-viable firms, which, given the uncertainty about future demand patterns, is not straightforward,” Borio said.