The State as Financier of Last Resort

Staff Discussion Notes, October 13, 2022

Source details

Canonical URL

The State as Financier of Last Resort

Other formats

• Markdown version
• Structured JSON version
• Bundle manifest

Bibliographic details

• Authors: Bryn Battersby, Raphael A Espinoza, Jason Harris, Gee Hee Hong, Sandra Lizarazo, Paolo Mauro, Amanda Sayegh
• Published: October 13, 2022
• Series: Staff Discussion Notes
• DOI: https://doi.org/10.5089/9798400220692.006

Summary

• During the COVID-19 pandemic and global financial crisis, governments acted as financiers of last resort through large financial support measures (FSMs) such as loan and guarantee programs and equity injections in firms.
• FSMs are argued to have prevented bankruptcies and attenuated the recession by:
  • increasing firms’ liquidity,
  • reducing risk premiums,
  • boosting confidence.
• FSMs also carry large and long-lasting fiscal costs and risks.
• The note emphasizes that ideally FSMs should be assessed and included in budget plans, while recognizing the need to balance speed and scrutiny during crises.

Key findings and analysis

• FSMs provided rapid support via loan programs, guarantee programs, and equity injections.
• Macroeconomic effects attributed to FSMs include:
  • fewer bankruptcies,
  • a milder recession,
  • improved firm liquidity,
  • lower risk premiums,
  • higher confidence.
• Trade-offs highlighted:
  • Immediate stabilization benefits versus large and persistent fiscal costs and risks.

Policy recommendations and management guidance

• Manage legacies of COVID-19 FSMs with targeted policy actions (high-level recommendations presented).
• Prepare for future crises by:
  • establishing frameworks to assess FSMs,
  • including FSMs in budget plans where feasible,
  • striking a balance between the need for rapid deployment and the need for scrutiny and assessment.

Subjects and keywords

• Subject: Economic sectors, Financial crises, Financial institutions, Financial sector policy and analysis, Health, Money, Public financial management (PFM)
• Keywords: Bailout, Below the line, COVID-19, Credit, credit guarantees program, equity injection, Equity injections, equity purchase, Fiscal policy, Fiscal risks, Global, Government guarantees, government loan, Government loans, Loans, pre-existing FSM framework, Public sector balance sheet, Solvency

Content in this bundle

• Staff Discussion Note
  • Staff Discussion Note (Markdown version)
  • Staff Discussion Note (PDF)