The IMF projects that Europe stands to lose 15 million jobs unless authorities roll out new equity support, warns the International Monetary Fund (IMF), which puts the cost of providing companies with sufficient equity to overcome the difficulties at around 2 to 3 per cent of GDP.
According to IMF estimates, the massive support policies implemented in response to the pandemic saved millions of European companies and, with them, more than 30 million jobs. But as these measures expire, bankruptcies may increase, with unemployment and non-performing loans rising as a result, so it recommends maintaining emergency programmes and assistance, albeit adapted, to support a robust recovery in 2021.
The IMF suggests that the authorities will have to redirect their aid, and give way to equity support for those companies with good post-pandemic prospects.
Public support has covered 60% of the liquidity needs of European firms resulting from the COVID-19 crisis, but only 30% of the capital shortfalls, which, despite the magnitude of the support deployed, has raised the percentage of insolvent firms out of the total by 6 points.
The IMF notes that capital shortfalls are higher for micro and small firms, as current policies absorb only a quarter of their negative capital imbalances, compared to more than two-fifths for large firms.
The targeting of aid will be vital to avoid wasting taxpayers' money. The IMF recognises that the procedure needs to be improved and will result in more precise but more complex mechanisms, which will reduce the leverage and speed of aid.
Involving banks, which know their clients and assess business plans on a daily basis, can help correct the "adverse selection", which makes aid more attractive to 'bad' companies than to 'good' ones, as the public sector is not well equipped to assess the viability of a large number of small companies or to monitor their performance.
"Europe needs to reorient aid to companies, focusing on strengthening their equity capital at the expense of liquidity. For companies that need to restructure their debt or liquidate, out-of-court debt restructuring and insolvency regimes should be improved," explains the IMF.
Strengthening corporate health will prevent a vicious circle between the European real sector and the financial sector from re-emerging. "Healthier firms will create more jobs," concludes the IMF.