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Impact of Covid-19 on corporate solvency and possible policy responses in the EU

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  • Mirza, Nawazish
  • Rahat, Birjees
  • Naqvi, Bushra
  • Rizvi, Syed Kumail Abbas

Abstract

The massive contagion of new coronavirus (Covid-19) has disrupted many businesses across the European Union. This has resulted in an immense drag on the revenues and cash flows that may lead to a significant increase in corporate bankruptcies. In this paper, we investigate the impact of Covid-19 on the solvency profile of the firms in the EU member states. We introduce multiple stress scenarios on the non-financial listed firms and report a progressive increase in the probability of default, an increase of debt payback, and declining coverages. Our results indicate that the solvency profile of all firms deteriorates. The manufacturing, mining, and retail sector are most vulnerable to a decline in market capitalization and a reduction in sales revenues. The paper also examines the possible policy interventions to sustain solvency at a pre Covid-19 level. Our findings suggest that for a moderate deterioration in economic conditions, a tax deferral is sufficient. However, in the event of exacerbating business shocks, there should be hybrid support through debt and equity to avoid a meltdown. This study has important implications for policymakers, corporate managers, and creditors.

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  • Mirza, Nawazish & Rahat, Birjees & Naqvi, Bushra & Rizvi, Syed Kumail Abbas, 2023. "Impact of Covid-19 on corporate solvency and possible policy responses in the EU," The Quarterly Review of Economics and Finance, Elsevier, vol. 87(C), pages 181-190.
    • Handle: RePEc:eee:quaeco:v:87:y:2023:i:c:p:181-190
    DOI: 10.1016/j.qref.2020.09.002
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    2. Dai, Zhifeng & Luo, Zhuang & Liu, Chang, 2023. "Dynamic volatility spillovers and investment strategies between crude oil, new energy, and resource related sectors," Resources Policy, Elsevier, vol. 83(C).

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    More about this item

    Keywords

    Solvency; Coronavirus; Probability of default; Cash flows;
    All these keywords.

    JEL classification:

    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation

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