Lending a Hand: Should the government be bailing out companies indefinitely?

May 10, 2020

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3 min read

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What's going on here?

The coronavirus has taken its toll on companies of all sizes across the world. Governments have responded by offering large stimulus packages to attempt to stop the current recession becoming a depression. Such measures are however controversial.

What does this mean?

The UK Chancellor Rishi Sunak recently unveiled a hefty £350bn fund comprising a loan scheme and other forms of aid which will cover the wages of millions of workers and prevent firms from becoming insolvent. Meanwhile in America, President Trump has signed a $2.2tn coronavirus rescue package. The airline industry has been given a large stimulus package amounting to $50bn. Despite the ongoing scandal and grounding of 737 MAXs, aircraft manufacturer Boeing is also receiving billions of taxpayers’ dollars. 

The goal of these schemes is to stimulate the economy and pay workers. Although such measures have been praised for helping to mitigate the economic effects of COVID-19, there remains strong controversy regarding the efficacy and moral hazards of these measures. 

A quarter of listed Western firms are heavily indebted; further reliance on state loans may therefore endanger their balance sheets (the record of a company’s assets and liabilities). Some say the government should attach conditions to these loans and limit government interference. In the aftermath of 2008, negotiations over loans enabled politicians to influence firms’ strategies with bailed-out firms becoming indebted and burdened by long-term guarantees.

What's the big picture effect?

The pandemic has highlighted the difficulty governments face in achieving the right balance between allowing free markets to thrive while helping sustain the economy in this time of crisis. 

Free market principles say that businesses should be allowed to exist or die. Bailouts should not be a way of allowing corporations to lower their standards and act as if there will always be a safety net supporting them. Of course, the current pandemic cannot be attributed to large corporations. 

There are fears of “corporate socialism” where governments transfer capital to companies. Bailouts should not be seen as a free pass for companies. The Financial Times stated that while this is an opportunity for the state to use cheap capital to acquire strong businesses facing a temporary halt to their operations, it should be kept in mind that the objective is to help those in need. 

A paper by the Institute of Public Policy Research has noted that government bailouts could be profitable for the taxpayer as it sustains employment and businesses. There are also arguments that companies which are “too big to fail” or provide essential services such as electricity should receive bailouts. 

The solution proposed by The Economist is one that provides blanket support for all firms while helping to pay the wages of inactive staff with conditions attached. Ensuring that banks have enough to lend, say by suspending dividends, may help. Extending unlimited credit with too much governmental influence will not help. State intervention on a limited scale, however, may help revive the economy. 

While the current business climate does not appear optimistic, it is likely that there will be a string of M&A deals post-pandemic. Indeed, many businesses are pulling out of M&A transactions at the present in an attempt to preserve cash. However, as Oliver Lazenby, an M&A partner at Freshfields, has noted, “there will be winners and losers…if you call the bottom correctly you can get into an M&A situation on very favourable terms”. In other words, there are predictions that there will be a surge in M&A deals by the end of this pandemic, with surviving businesses rushing to acquire smaller, weaker competitors. Even now, investors are eyeing up the business landscape to see which companies will succeed and which ones will fall. 

Report written by Robyn Ma

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