Free DP Download 08 October 2020 - COVID-19 AND SME FAILURES

Thursday, October 8, 2020

Pierre-Olivier Gourinchas, Sebnem Kalemli-Ozcan, Veronika Penciakova, Nick Sander  
CEPR DP No. 15323 | September 2020

Covid-19 may seriously disrupt the economic fabric by pushing a large number of small and medium enterprises into bankruptcy. A new CEPR study by Pierre-Olivier Gourinchas, Sebnem Kalemli-Ozcan, Veronika Penciakova, Nick Sander estimates the impact of the Covid-19 crisis on business failures among small and medium size enterprises (SMEs) in seventeen countries in the EU using a large representative firm-level database. The study measures each firm's liquidity shortfall during and after Covid-19, and allows for a rich combination of sectoral and aggregate supply, productivity, and demand shocks. Among the findings: 

  • The study estimates a large increase in the failure rate of SMEs under Covid-19 of nearly 9 percentage points, absent government support. 
  • Accommodation & Food Services, Arts, Entertainment & Recreation, Education, and Other Services are among the most affected sectors. 
  • The jobs at risk due to Covid-19 related SME business failures represent 3.1% of private sector employment. 
  • Despite the large impact on business failures and employment, only moderate effects are anticipated on the financial sector: the share of Non Performing Loans on bank balance sheets would increase by up to 11 percentage points, representing 0.3% of banks' assets and resulting in a 0.75 percentage point decline in the common equity Tier-1 capital ratio. 
  • The fiscal cost of an intervention that narrowly targets at risk firms can be modest (0.54% of GDP). 
  • However, at a similar level of effectiveness, non-targeted subsidies can be substantially more expensive (1.82% of GDP). 

In the European Union SMEs, consisting of firms with less than 250 employees, account for a striking 99.8% of all employer firms, 65% of private sector employment and 54% of private sector gross output. Despite their importance, SMEs are exposed to a major vulnerability – they are critically dependent on debt, especially bank loans, for financing. 

Should a wave of SME failures occur, the efforts to contain the economic consequences of the pandemic will have failed. Public support to address these SMEs’ liquidity shortages is thus essential to ensure a smooth recovery of the economy.

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