Global Financial Leaders Urge Prevention of Corporate Insolvency Crisis Post-COVID-19

G30 Including Former Central Bank Governors Draghi and Rajan, Report States
"Targeted Support Needed Rather Than Broad Liquidity Expansion"

[Image source=Reuters Yonhap News]

[Asia Economy Reporter Jeong Hyunjin] Global financial leaders, including former European Central Bank (ECB) President Mario Draghi and former Reserve Bank of India (RBI) Governor Raghuram Rajan, have expressed concerns about a 'solvency crisis' where companies fail to repay debts following the COVID-19 pandemic. This reflects the recognition that if economic stimulus through massive funding reaches its limits, a wave of corporate bankruptcies could become a reality. These leaders argued that the scope of support should be narrowed and bankruptcy laws revised to prevent companies from collapsing.

On the 14th (local time), the international economic analysis organization G30 released a report titled "Corporate Sector Reconstruction and Restructuring in the Post-COVID Era," urging "swift and prudent policies to restore corporate soundness." G30 is a think tank advising global financial policies. Its members include Yi Gang, Governor of the People's Bank of China, former ECB President Jean-Claude Trichet, former Bank of England (BOE) Governor Mark Carney, former U.S. Treasury Secretary Lawrence Summers, and New York City University Professor Paul Krugman.

G30's concerns stem from the judgment that policies pumping massive liquidity cannot sustain corporate activities. For companies that borrowed large sums at low interest rates, the cessation of extensive economic stimulus after the COVID-19 crisis inevitably leads to a 'solvency cliff.' They pointed out that "non-performing loans of companies have rapidly increased" and emphasized the need to narrow the support scope to focus aid on companies capable of surviving independently.

In this process, they argued that 'zombie companies' unable to sustain themselves should be allowed to naturally go bankrupt. Although political backlash may arise over the issue of companies struggling to survive, they added that a "difficult choice" is necessary for economic soundness after the COVID-19 crisis. Former Governor Rajan stated, "Government intervention should focus on addressing market failures and managing the necessary creative destruction."

However, they also argued that mechanisms should be established to facilitate liquidity supply to companies that can be saved, and that bankruptcy-related laws need to be amended to rescue companies that are "fundamentally sound but lack assets."

Furthermore, G30 suggested actively utilizing private sector resources given the limited fiscal resources available. When companies receive support, they should comply with conditions aligned with social goals such as the government's push for a green economy, creating synergistic effects. Additionally, maintaining soundness to ensure that private finance continues to provide loans to households and companies and supports economic recovery is also important.

Mario Draghi, who led this report, emphasized, "The solvency crisis has already permeated the corporate sector base in many countries," urging "policymakers to act swiftly." He expressed concern that "the problem is more serious than it appears on the surface," and "the full scope of the problem is obscured by massive liquidity support and the unprecedented turmoil caused by the crisis." In an interview with the U.S. online media Axios, he said, "(The economic stimulus due to the COVID-19 crisis) will continue for a long time," adding, "The key is how to use that money well."

This content was produced with the assistance of AI translation services.