It is not yet possible to estimate the extent of the revenue losses due to the coronavirus. Particularly small and medium-sized enterprises, self-employed persons, freelancers, temporary workers or migrant workers still have no idea what they will face. They often lack sufficient financial resources that will allow them to deal with considerable declines in revenues. They have to reduce their expenditures, thus exacerbating revenue and income declines for others. As a consequence, they may be forced to sell real estate and other assets encumbered with loans at rock-bottom prices. A downward spiral of decreasing economic activity could lead to the dissolution of entire economic sectors, for example, event organisers or tourism. There seems to be a wide consensus that such losses of revenue are in the best interest of the society and therefore have to be accepted. However, the question is whether it is appropriate for these losses to be financed by individuals or corporations?
The current coronavirus crisis has created a situation in which loans may have to be repaid, while any new lending is inhibited because entrepreneurs as well as banks are unable to assess credit risks. Even if government-backed bridge loans are made available, many companies are faced with the question of whether to reduce or discontinue their activities and how to cope with incalculable risks.
A reduced amount of credit money erodes purchasing power both in the capital markets and in the market for goods and services. This can lead to a deflationary chain reaction with less money and further loan repayments due to falling asset prices – such as prices for shares and real estate. The question arises under which circumstances trading on the stock exchange should be suspended so that emergency sales at rock-bottom prices do not have to be made in the middle of a crisis. Investment banks could then concentrate on primary markets.
Jens Weidmann, president of the Deutsche Bundesbank, does not see monetary policy at the forefront of the fight against the economic crisis unleashed by the coronavirus (interview with the German newspaper WELT on 21.3.2020). In fact, the instruments of monetary policy seem to have reached their limits during this crisis: Central bank money creation, mainly through the purchase of government and corporate bonds, may support asset prices. However it falls short of having substantial impact on markets for goods and services. Trading of existing assets in secondary markets does not directly lead to liquidity inflows at the corporate levels and especially not to smaller players. An infusion of “helicopter money”, as seen in Hong Kong and in the US, may help ensure the solvency of consumers to a certain extent. However, such spending cannot prop up demand in economically inactive sectors such as aviation and tourism.
In this situation, a public “after-the-event” insurance to counteract the loss of revenues could work against a deflationary chain reaction. This instrument could provide security to market participants in entering into new contracts and act as an important prerequisite for continued lending.
Insurance companies assume financial risks by spreading risk and distributing the financial impact of losses over time. This is usually done by making payments before an incident occurs. Yet it is also possible to arrange insurance coverage after the occurrence of a loss – i.e. “after the event”. This is particularly common when the costs of a loss cannot be calculated beforehand.
For the current corona crisis, a practical measure could be designed in the following manner:
A central bank could provide a 100-year financial instrument with zero percent interest for a “Corona Compensation Fund”. There could be a line of credit which the fund can call upon on a monthly basis and which could be as high as the loss of gross national product. Using this financial instrument could thus compensate the losses of revenues from regular market transactions.
The fund could initially provide guarantees for bridge loans to bank customers. Banks understand their customers‘ past revenues and would then compensate their customers‘ revenue losses through bridge loans on a monthly basis. This would allow market participants to meet their payment obligations. The amount of those revenuecompensations could decrease over time and then peter out once the crisis management measures have ended.
Subsequently, borrowers could apply to the newly created state “after the event” insurance for their loss of revenues to be covered by the “Corona Compensation Fund“. The applications could, for example, be handled by insurance companies that examine and settle the reimbursement cases for the Compensation Fund.
A prerequisite for obtaining coverage from the “after-the-event” insurance would be that applicants need to fulfill their own obligations to suppliers, customers, employees, banks and shareholders. Dividends as well as appropriate entrepreneurial profits would have to be included. Insofar as possible and permitted, companies would have to continue offering their range of products and services. An increase of profits should lead to a reduction in coverage. In the event of violations of regulations regarding the containment of the corona virus, such insurance benefits could be partially or totally reduced.
After the crisis, repayments could occur in various ways: yet it would be worth considering to make this a compulsory insurance for all companies to be funded from retroactive premium payments. The premium would be a function of the respective future revenues.
The advantages of such a public “After the Event“ insurance for loss of revenues would likely be high: If the revenue losses from one year were to be distributed to a large number of market participants over a period of 100 years at 0 percent interest , then the costs of these obligations would be hardly noticeable. Such a solidarity-oriented insurance would also prevent crisis profiteers from benefiting from the illiquidity of the victims of a natural calamity.
From a European perspective, it would not only be desirable, but most likely imperative, to set up such a „Corona Compensation Fund” on a European rather than a national basis — at least for the Euro area. All market participants in the single currency area would benefit from the continued functioning of credit creation. Correspondingly, everyone would also have to contribute to long-term repayments in order to avoid distortions of competition.
The American US dollar-based financial system is extremely competitive and, even in the current crisis, is developing creative solutions. A highly developed financial system has also emerged in China and other Asian countries. Since the corona epidemic is undoubtedly a global problem, it would also be conceivable to finance a compensation fund via the IMF, for example by providing special drawing rights.
Such a concept of a public “After the Event” insurance for loss of revenues is comparable to the successful Marshall Plan for the reconstruction of Europe after the Second World War. It is always better to not wait until the war is over, but to preserve existing structures so that a recovery take place more quickly and in a much more humane way. Above all, it prevents conflicts for the distribution of benefits. Wouldn’t it be better, if the task of protecting people is shared by all?
Last updated on 19.04.2020
On behalf of Kaleidoskop Economics GmbH, the authors, Frank-Martin Binder and Stefan Schmidt-Ammon, focus on research on negative interest rates.
The Authors thank Julia Kristina Culver for her support with the English translation.
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