Impact of Covid-19 on corporate solvency and possible policy responses in the EU

Nawazish Mirza, Birjees Rahat, Bushra Naqvi and Syed Kumail Abbas Rizvi

The Quarterly Review of Economics and Finance, 2023, vol. 87, issue C, 181-190

Abstract: The massive contagion of new coronavirus (Covid-19) has disrupted many businesses across the European Union. This has resulted in an immense drag on the revenues and cash flows that may lead to a significant increase in corporate bankruptcies. In this paper, we investigate the impact of Covid-19 on the solvency profile of the firms in the EU member states. We introduce multiple stress scenarios on the non-financial listed firms and report a progressive increase in the probability of default, an increase of debt payback, and declining coverages. Our results indicate that the solvency profile of all firms deteriorates. The manufacturing, mining, and retail sector are most vulnerable to a decline in market capitalization and a reduction in sales revenues. The paper also examines the possible policy interventions to sustain solvency at a pre Covid-19 level. Our findings suggest that for a moderate deterioration in economic conditions, a tax deferral is sufficient. However, in the event of exacerbating business shocks, there should be hybrid support through debt and equity to avoid a meltdown. This study has important implications for policymakers, corporate managers, and creditors.

Keywords: Solvency; Coronavirus; Probability of default; Cash flows (search for similar items in EconPapers)
JEL-codes: G30 G33 G38 (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:quaeco:v:87:y:2023:i:c:p:181-190

DOI: 10.1016/j.qref.2020.09.002

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