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Liquidity to solvency: transition cancelled or postponed?

Ryan Banerjee, Joseph Noss and Jose María Vidal Pastor

No 40, BIS Bulletins from Bank for International Settlements

Abstract: Since the start of the Covid-19 pandemic, a "bankruptcy gap" has emerged between measures of expected and realised bankruptcies globally. The ample supply of credit to make up for short-term losses has been an important factor decoupling bankruptcies from the sharp reduction in firms' cash flows. Firms' reliance on credit suggests that it may be too early to dismiss future solvency risk. Significant increases in leverage and weak earnings forecasts in some sectors suggest that for some firms, greater credit extension may have only postponed, rather than cancelled, their insolvency.

Pages: 9 pages
Date: 2021-03-25
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