Unconventional Credit to Firms during the Financial Crisis

Gustav Martinsson, Research Fellow in Financial Economics, Royal Institute of Technology


Unconventional Credit to Firms during the Financial Crisis (Seminar in Swedish)

sns-research-brief-nr-40-english-summary.pdf 89.4 KB PDF

The global financial crisis hit Sweden with full force in the fall of 2008. The confidence of the banking sector suffered and both GDP growth and fixed capital formation fell steeply during 2009. The Government, the Central Bank, , and the National Debt Office adopted many measures in order to ensure financial stability. On top of this, there were signs that firms were liquidity constrained. Therefore, the Government launched a temporary law that allowed firms to postpone paying up two months’ worth of labor related taxes and fees. Any delayed payments were treated as a loan from the Swedish government and charged with interest. This report presents an analysis of the loan program.

The loan program had several interesting properties. First, by targeting a firm’s labor taxes, firms did not have to be profitable to gain liquidity from the program. Second, the lending facility was accessible through the monthly labor tax form, making it straightforward for the firm to access the funds. Third, firms did not have to post collateral, or go through a formal approval process to gain liquidity from the policy. And, finally, the interest rate was set so as not to crowd out other
kinds of loans.

Around 1,000 firms out of 20,000 sampled firms used this emergency lending facility. The increase in liquidity gained from using the lending facility allowed participating firms to increase both net debt levels and real investment spending. The need for liquidity was most pronounced in younger and more leveraged firms.
This report was presented as a part of the Finance Panel which is a forum for the financial sector and is jointly organized by SNS and finance research institute Swedish House of Finance. The Swedish House of Finance at the Stockholm School of Economics is Sweden’s national research center in financial economics. In the Finance Panel meetings, leading representatives for the financial sector meet with key opinion leaders from the public and private sector and from civil society. Featured speakers are respected experts from the financial markets and academia.

The report was presented at an SNS seminar in Stockholm on March 7, 2017 where Karolina Ekholm, State Secretary at the Ministry of Finance participated.
“During a financial crisis, when there is a lack of liquidity, it is justified to use fiscal measures that increase credit supply. If no crisis prevails, such measures entail costs for taxpayers as a result of credit losses”, Ekholm said.