Without a recovery of the business sector there will be no sustainable growth in Canada
All this borrowing has forestalled a rash of business failures but firms’ high and accelerating indebtedness at a time of declining revenues means many eventually will become insolvent. Delaying rent or tax payments, as many have been able to do, merely means these expenses will come due just as the moratorium ends, with no guarantee revenues will return to the pre-crisis or higher levels needed to pay deferred expenses.
The same dynamic is unfolding in Canada today. Policy has emphasized keeping credit flowing to non-financial firms, increasing a debt many will never be able to repay. Firms have no choice but to take on the debt: the alternative is going out of business now. But not only is more debt not a long-term solution for many firms it also increases risks for lenders. What is needed is debt relief or equity injections on a scale that makes firms with viable long-term prospects solvent again.
According to Stein, the Bagehot approach won’t work in the current downturn because corporate debt is already at too high a level, while the unpredictable course of both the pandemic and government’s response to it make it impossible to differentiate between good and bad debt. Instead the federal government has to be prepared to buy debt from firms. To protect central bank independence, government — which of course ultimately means taxpayers — must absorb these losses.
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