International Monetary FundThe COVID-19 pandemic has increased insolvency risks, especially among small and medium enterprises (SMEs), which are vastly overrepresented in hard-hit sectors. Without government intervention, even firms that are viable a priori could end up being liquidated—particularly in sectors characterized by labor-intensive technologies, threatening both macroeconomic and social stability. This staff discussion note assesses the impact of the pandemic on SME insolvency risks and policy options to address them. It quantifies the impact of weaker aggregate demand, changes in sectoral consumption patterns, and lockdowns on firm balance sheets and estimates the impact of a range of policy options, for a large sample of SMEs in (mostly) advanced economies.

No less than 16% of SMEs in developed countries will become insolvent this year (The Netherlands not included). The risks are particularly great in Southern Europe, the IMF indicates in a study. Targeted capital injections by the government can save most of the businesses that are viable in normal times. One in six SMEs in the developed countries of Europe and East Asia is on the brink of collapse, despite all the liquidity support they received from their governments and banks during the corona crisis. With targeted capital injections, governments can prevent many normally viable businesses from going under and millions of people unemployed.