Governments should prepare to restructure, liquidate badly scarred firms

© Reuters. FILE PHOTO: The International Monetary Fund (IMF) logo is seen outside the headquarters building in Washington, U.S., September 4, 2018. REUTERS/Yuri Gripas/File Photo

By Andrea Shalal

WASHINGTON (Reuters) -Governments across the world should beef up their insolvency systems and prepare to restructure or liquidate badly scarred firms as they withdraw massive support provided during the height of the COVID-19 crisis, the IMF said on Wednesday.

The International Monetary Fund said corporate debt reached $83 trillion, or 98% of global gross domestic product, at the end of 2020, with advanced economies and China accounting for 90% of the nearly $9 trillion increase in 2020.

Now that central banks are raising interest rates to address inflation, firms’ debt servicing costs will increase and declining fiscal support will expose corporate vulnerabilities, the IMF's strategy chief Ceyla Pazarbasioglu and Rhoda Weeks-Brown, the fund's general counsel, wrote in a new blog.

"Governments were right to support firms financially through the worst of the pandemic," they said. "Now policymakers should calibrate financial support and direct it efficiently to companies that are in need. They should also be prepared to restructure or liquidate badly scarred firms."

They said that while many countries, including Brazil, France, Turkey and the United States, had strengthened their insolvency systems, corporate debt in many emerging economies was more vulnerable and insolvency systems there were weaker.

Almost 40% of advanced economies with vulnerable corporate debt also had insolvency systems that could struggle in the event of a large number of restructurings, the IMF officials said.

They said countries should adopt strong governance and transparency safeguards to mitigate risks and have clear exit plans from the start, while ensuring the involvement of private creditors.

Countries with limited fiscal space and ineffective insolvency systems should rely more on out-of-court or hybrid restructuring schemes, while tackling deeper reforms over the medium-term.

Those with fiscal leeway could provide more support but should avoid creating “zombie” firms that survived only with state assistance, they said.

The IMF also urged asset quality reviews at banks, warning that generous regulatory and accounting forbearance policies adopted to mitigate the economic impact of the pandemic had increased the risk potential non-performing loans were not reflected in their balance sheets.

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