Government lending in times of crisis
Sweden’s Global Financial Crisis lending program in 2009 was the first of its kind to focus on liquidity provision in a crisis; evaluating its effectiveness can give novel insights into how recently issued policies elsewhere — aimed at containing the fallout of the COVID-19 pandemic — will work.
As the coronavirus pandemic spread, governments around the world shut borders, enforced lockdowns, and imposed curfews, turning business as we know it on its head. To soften the blow, countries employed an unprecedented number of temporary lending and tax deferment programs, just as Sweden did during the Global Financial Crisis (GFC). How effective are these packages and how will they keep businesses afloat well after the pandemic is over?
Swedish House of Finance’s Gustav Martinsson and Christian Thomann, together with James Brown at Iowa State University, looked into Sweden’s 2009 government lending program in a new study to ask: what kind of businesses participated in the program? What did they do with the proceeds? How did these companies fare in the following years after the crisis?
Sweden’s 2009 Program
Being a small but open economy, Sweden was particularly hard hit by the GFC in 2008 and 2009. Although the Swedish government implemented several measures to ensure financial stability, it was concerned that the financial crisis had spilled over to the real economy, constraining liquidity in otherwise healthy firms.
During the peak of the GFC in April 2009, more than 15% of Swedish firms reported a “considerably harder than normal” access to finance (Fig.1). More than half of the respondents said it was harder than usual to access normal bank loans (Fig.2).
FIG. 1. Reports the fraction of firms responding it is considerably harder than normal to access finance in Sweden. Source: monthly survey “Financing the firm’s activities” conducted by National Institute of Economic Research.
FIG.2 Distribution of reasons firms have for why it was harder than usual to access finance in Sweden.
To combat the liquidity problem among firms, the Swedish government rolled out a program which allowed firms to postpone paying all labor-related taxes and fees typically due at the end of each month. These payments included withheld personal income taxes, fees to cover employees’ social security, government-provided healthcare insurance and workers’ compensation.
All suspended payments were treated as a loan from the government, and all such loans were charged a fixed and non-trivial interest rate at about 5.3% a year. The maximum amount of funding each firm could get from the program was twice the monthly amount of labor taxes and fees, which roughly corresponds to 9% of the firm’s annual total annual wage bill.
This program differed from traditional government lending programs, which generally take the form of longer-term grants to small businesses, loan guarantees to particular types of firms, and the opportunity to reduce taxes by accelerating deductions and depreciation on certain types of investment.
By targeting a company’s labor taxes, firms did not have to be profitable to gain liquidity from the policy. They participated by simply checking a box on the labor tax form, making it straightforward for the firm to access the funds and for the tax agency to administer the program. The estimated cost of administration is 16 million SEK or just 271 SEK (about USD 25) per loan; considerably lower than the usual costs associated with underwriting unsecured loans.
What kinds of companies participated in the program?
The study found that only about 6% of Swedish companies participated in the scheme. Firms in manufacturing and services used the program at higher rates than firms in wholesale and retail trade, construction, and transportation. The participating firms had less cash in reserve and entered the financial crisis with substantially higher debt-to-asset ratios.
The firms that took up the program were also younger, generated less internal cash flow, paid lower dividends, and had already used up a larger fraction of their granted credit line when the financial crisis hit. Overall, participating firms appeared to have lower access to standard liquidity management tools — like cash reserves and credit lines — in order to deal with a sudden short-term liquidity shock.
What did the companies do with the proceeds?
The study wanted to find out if firms would use the government loan to pay back other loans, and it found that firms made use of the program to increase overall debt levels instead.
This means that instead of paying off debt with the proceeds from the program, companies used the access to funding to improve their business, like funding their curret assets.
What happened to participating firms post-crisis?
It is a common notion that temporary lending programs tend to lead to more risk-taking among participating firms, or that firms ultimately struggle due to the additional debt burden.
However, the study found that despite an increase in debt among already highly leveraged firms, firms that benefited more from the lending program were not any more likely than other participating firms to file for bankruptcy in the immediate post-crisis period. In fact, more exposure to the program was associated with a substantial reduction in the likelihood of a firm encountering severe financial distress.
Government lending programs during COVID-19
The Swedish Global Financial Crisis lending program was the first of its kind when launched in 2009. Evaluating its effectiveness is therefore relevant for policy responses to the COVID-19 pandemic both in Sweden and elsewhere.
FIG. 3 main tax measures to support business cashflow in OECD and G20 countries
A majority of OECD member countries have introduced similar lending programs, as seen in the figure above. The Netherlands for example, allowed for all firms to defer their social security contributions, personal income taxes and value-added taxes (VAT) for as long as six months, while Australia offered similar deferment programs for Small and Medium Enterprises only. Sweden itself re-launched the GFC lending program in 2020 in a manner virtually identical to the one introduced in 2009, but with a broader set of taxes eligible for deferral, such as VAT.
The Swedish government-appointed COVID-19 Commission recently published a report evaluating the economic measures rolled out during the pandemic. The Commission’s verdict was positive, although it is important to note that while the Commission mentioned the loan program, it did not provide for an evaluation of this specific program.
Q&A with co-author Christian Thomann, Associate Professor at the Royal Institute of Technology (KTH)
Isn’t the fallout of the pandemic very different from the financial crisis in 2008-2009?
There are significant differences. In particular, the earlier loan program was introduced in response to a significant shock to the financial sector, whereas the COVID-19 pandemic led to an unprecedented fall in real economic activity.
An important question is whether temporary lending facilities are as effective when economic activity declines so sharply. Indeed, the rapid decline in economic activity has prompted governments to introduce programs not only to protect employment using tax deferrals, but also temporary layoffs, and to offer firms a reorientation support.
In addition, the COVID-19 programs tended to allow deferral on a wider range of taxes, and thereby likely affected a broader range of firms. As such, there should be more power to evaluate the effects of temporary programs and to identify heterogeneous effects across different types of firms.
How did non-participating firms fare compared to companies that did not make use of the program post-crisis?
Given that the program was basically open to all firms in Sweden it is difficult to answer this question.
It is easier to think about two identical firms in two countries, where one country has a such a program and the other one does not. Here our research would suggest that a firm in the country which extends temporary loan facilities of this kind is better equipped to maintain its current assets and increase its ability to benefit from opportunities arising once the crisis has receded.
On a macro level, this type of program may contribute to an economy’s resilience as it is likely to reduce counterparty risk. The idea here is that a firm will know that its counterparts can also use the loan program to access liquidity in order to fund its purchases.
Did some participating firms use the proceeds to pay off other loans? How did they fare in the years following the crisis?
It is possible that some firms used the proceeds to repay other loans. However, on an aggregate level our results do not indicate that this was very common.
What are the implications of increasing net debt — on a firm’s balance sheet — and on the wider economy?
Excessive debt in the corporate sector is of course an area of concern. However, excessive deleveraging in times of crisis is likely to contribute to increasing the amplitude of the business cycle. This is commonly referred to as the financial accelerator, a phenomenon that among others Ben Bernanke, the former chair of the Federal Reserve, has studied.
Are there Swedish-specific traits (business environment, business culture, habits) that make this type of program particularly successful in Sweden, and maybe not as successful elsewhere?
It is possible that there are some Swedish traits contributing to the success of the program. I would think that a taxation authority with well-functioning IT systems able to ensure compliance and minimize the risk of fraudulent loans is more important than country-specific traits. Another factor might be the level of trust that citizens place in their taxation authority, as this may affect citizens’ willingness to share data with said authority, or to ask for clarification. The Swedish taxation authority is commonly among the most trusted authorities in Sweden. This might have contributed to the success of the program.