Experts predict a record number of Brazilian companies will close in the coming months due to the economic fallout from the Covid-19 pandemic. As reported by financial newspaper Valor, requests for court-supervised recoveries increased by 68.6 percent, and bankruptcies increased by as much as 30 percent from April to May. Consultancy Pantalica Partners estimates at least 3,000 companies could seek court-supervised recoveries if Brazil’s GDP falls by 6 percent this year. It is a significantly higher impact than that of the 2016 recession (1,863). However, according to research at the Getulio Vargas Foundation (FGV) think tank, government help arrives too late, and extending credit is not enough to deal with the scale of the crisis.
The main line of defense of the government against the economic crisis has been focused on emergency financing through extending credit. FGV researchers argue that credit is not the right method to stop companies from going insolvent.
The average Brazilian company only had cash for 60 days, but that time has passed since the beginning of the pandemic. Banks have opened up the possibility of extending credit to those who were up to date with their payments. The current grace period ranges from 60 to 180 days, depending on the operation, the customer, and the financial institution.
Providing liquidity
According to the Brazilian Federation of Banks, 9.7 million companies with a total debt of BRL 550.1 billion were renegotiated from the beginning of March until May. However, it might not be enough. There are some suggestions that a possible way forward would be for the Central Bank to buy up private securities. This would have only limited effects as small companies do not have access to the capital market.
The problem with extending credit is that it only works as a tool to help solvent organizations and is much less effective in preventing the closure of the companies worst hit by the drop in trade due to social isolation. According to Fernando Veloso, a professor at Fundação Getulio Vargas, if the government’s approach does not change, countless companies will close. Many of them do not have the money to pay their debts, so extending credit is not sufficient to deal with this crisis.
The existing approach of providing liquidity to businesses works out for large companies but leaves small businesses facing massive losses out in the cold. According to another study, “the concern with job losses is so great that programs are migrating to cash transfer programs.” “But there is no fiscal room for this type of solution in Brazil. The country is not prepared to face a primary deficit above 10 percent of GDP.”
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