Access to Liquidity in a Financial Crisis

Mar. 16, 2020

The Swedish government presented a support package to Swedish companies worth up to 300 billion Swedish Krona (SEK) in order to mitigate the adverse economic effects of the Corona crisis.

This support is to a large extent granting firms the option to postpone paying labor related taxes (employees' income taxes, social security payments, and payroll taxes) and value added taxes (VAT). The policy implies that firms can postpone up to three months’ worth of these taxes up to 12 months at the longest. The policy is suggested to take effect on April 7 but it can be used retroactively from tax payments starting January 1 of this year. The program introduced in Sweden is similar to the programs foreseen to be introduced in – among other countries – Germany and suggested by the OECD (2020).[1]

Sweden is unique as it has prior experience with this policy. The policy was used during the Financial Crisis in 2008-2009 in order to mitigate the adverse effects for (otherwise financially sound) companies. At that time, postponed taxes made up about seven percent of the total private sector wage bill.[2] It is worth noting that there are two differences between the current policy and the one enacted in 2009: this time VAT is included and the number of months’ worth of taxes to postpone is three instead of two.

I, together with two other researchers, have studied the policy from 2009 (see links below). The aim of the policy today and back in 2009 was to mitigate acute liquidity constraints in companies. The policy is innovative and circumvents standard issues often rendering fiscal policy responses to mitigate liquidity constraints inefficient and slow. This policy offers liquidity that is easy to access, available to almost all firms, and only accessible for a short window during a crisis period. Firms do not have to post collateral, submit paperwork, or go through a formal approval process to gain liquidity from the policy. As such, this policy differs sharply from more typical government lending programs, which generally take the form of longer-term grants or loan guarantees to particular types of firms.

In our study, we find that relatively few firms actually used the policy in 2009. However, the ones that did use the policy were the intended firms: otherwise healthy firms adversely affected by a liquidity shortage. As cited above, the take up rate of the policy in 2009 was equivalent to seven percent of the total private sector wage bill. But, the policy in effect serves as insurance to the entire private sector. Every firm knows that if necessary it is possible to get a sizable liquidity injection by postponing certain taxes. In fact, the maximum amount available from the policy in 2009 is sizeable and economically meaningful. In addition, this time, the maximum amount is increased considerably by offering a 50% increase in the number of months’ worth of taxes to postpone and it now includes VAT.

The policy used in 2009 and which will be reintroduced during the current crisis is novel and circumvents the need for an intermediary when it comes to the liquidity provision of constrained firms. This policy immediately makes billions of SEK in liquidity available to all private sector companies. This way the policy is fast and delegates the decision to the firms themselves.

It is important to keep in mind that the crisis in 2009 stemmed from a financial crisis and affected many manufacturing firms with a collapse in foreign demand. This time is different. The crisis now is one of an anticipated drop in demand. There will be different kinds of sectors affected this time. Some sectors will be affected dramatically. However, the fundamental issue remains similar. A sudden adverse shock to the economy that affects large portions of the Swedish firms and even firms worldwide. While it is impossible, in part given how fast this this crisis proceeds, to try to help with each firms unique problem, this policy enables firms to themselves quickly decide whether they need to use a liquidity injection. Moreover, even for the firms not in need of liquidity today, they know that if problems do arise that they can quickly access funds. Given how interconnected the world economy is today it is important that many governments act in order to reduce unnecessary contagion and that they quickly provide liquidity to as many firms as possible.

Will this policy solve all problems? No, 0ther measures that will be necessary to support citizens (eg paid sick leave to prevent people carrying the virus to come to work) and sectors will be necessary.

 

Reading:

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2506694

https://www.sns.se/aktuellt/sns-analys-40-okonventionell-kredit-till-foretag-under-finanskrisen/ (in Swedish)