Corporate financial health has been hit hard by the pandemic. The Spending Review presented a chance to lay out a plan on how to help firms cope, but this opportunity was missed. So far, the UK government response has mainly focused on encouraging firms take up more debt and providing small grants to help small businesses stay afloat.
In order to restart business and the economy, much more needs to be done to help businesses struggling with large amounts of debt. Indeed, some firms have already reached the maximum borrowing limits under the schemes. For many firms, currently the only answer could be going into bankruptcy and ultimately liquidation – like Debenhams has – with large costs to employment and chances of an economic bounce-back.
Policy measures should seek to prevent the closure of firms that would be viable once restrictions lift and aggregate demand returns. One means to address this is through the bankruptcy regime. However, some firms will need further support. For many UK firms, in addition to debt restructuring, injections of equity could play a hugely important role. Contrary to debt, equity can better absorb losses, reduce leverage and in turn give other investors certainty around the long-term viability of a firm.
In this briefing paper we argue that public equity injections should play a key role in supporting businesses through the pandemic. The state, with its strong balance sheet, will be able to provide equity in ways that the market alone will under-provide . During the 2008 financial crisis, the state acted as the stabilising debt and equity investor, assuring markets, and boosting the economy. While initially incurring large costs many rescue operations did make a financial return, for instance, the shares of Lloyds Banking Group were ultimately sold at a profit. The same is likely true this time. A concerted and targeted injection of equity could help save hundreds of thousands of jobs in sectors where firms are currently at risk and the associated income in firms currently at risk.
This brieifng is jointly published by the IPPR Centre for Economic Justice and Common Wealth, an independent progressive think tank that designs ownership models for a democratic and sustainable economy. www.common-wealth.co.uk
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