Loan Guarantees – Are They Enough to Fight COVID-19 Recession?

One of the main responses from the European Union to fight the COVID-19 recession was to provide guarantees for cheap loans to businesses. The size of the allocations differs by country, with Germany in the lead, followed by Italy and the United Kingdom.

The fact that Germany allocated more than twice as the other European countries should not come as a surprise. One of the countries with a large budget surplus, Germany was the subject of many critiques in the last years as to hoarding cash instead of spending it. Now that the coronavirus affects the German economy as it does the rest of the world, Germany finds its pockets full of money ready to be deployed to help the economy.

Weathering the Supply and Demand Shock in Europe

The European lockdowns took different shapes in various countries. Italy closed all of its economic activity, Spain followed closely, while Germany imposed more relaxed measures.

In response to the economic shock, loan guarantees accounted to more than 69% of the response the main European economies had. Besides that, governments also used value transfers such as income support and temporary exemptions from social security contributions.

Spain offered small and large businesses loans under privileged conditions. For example, the so-called ICO loans provided to small “autonomos” in the country had a big success, being tapped by those that didn’t close their activity during the crisis and conditions were more than favorable – 5-years loan, only interest charged in the first twelve months, super-low interest for the entire loan, and so on.

In other words, if there was a time to kick-start a new project or to take funds to support your activity, this was it.

Germany went even further with its “kurzarbeit” scheme – instrumental in keeping businesses afloat during the pandemic. Effectively, this is a social insurance program that allows employers to reduce their employees working hours, instead of laying them off. For example, a worker receives sixty-percent pay for the hours not worked and a hundred percent for hours worked.

Yesterday, the German state announced that the European Commission approved Germany’s plan for releasing another fund of EUR 500 billion to support enterprises affected by the COVID-19 outbreak. It is just another example telling us that the states will not stop at anything and money is available – we just need to find a way around the bureaucratic mechanism to access it.

So far, so good.

Broker discussion area