OECD Economic Outlook, Volume 2020 Issue 2
The COVID-19 pandemic will cast a long shadow over the world’s economies and the economic outlook is very uncertain. This issue of the OECD Economic Outlook analyses the impacts of COVID-19 on the economy and puts forward projections for output, employment, prices, fiscal and current account balances.
This issue includes a general assessment of the macroeconomic situation, a series of notes on the current policy challenges related to the COVID-19 pandemic and a chapter summarising developments and providing projections for each individual country. Coverage is provided for all OECD members as well as for selected partner economies.
Issue Note 2. Insolvency and debt overhang following the COVID-19 outbreak: Assessment of risks and policy responses
This note investigates the likelihood of corporate insolvency and the potential implications of debt overhang for non-financial corporations associated with the Coronavirus (COVID-19) outbreak. Based on simple accounting exercises, it evaluates the extent to which firms may deplete their equity buffers and increase their leverage ratios in the course of the crisis. Next, relying on regression analysis and looking at the historical relationship between firms’ leverage and investment, it examines the potential impact of higher debt levels on investment during the recovery. Against this background, the note outlines a number of policy options to flatten the curve of crisis-related insolvencies, which could potentially affect otherwise viable firms, and to lessen the risk of debt-overhang, which could otherwise slow down the speed of recovery.
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