Biggest crisis test is still to come with insolvencies, according to BIS by Bloomberg

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© Bloomberg. A chain and lock secure an entrance to a temporarily closed Macy’s Inc. site in Honolulu, Hawaii, United States, Monday, May 11, 2020. Hawaii is not reporting any new cases of the virus for the first time in nearly two months, a reported Associated Press. Photographer: Marie Eriel Hobro / Bloomberg

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(Bloomberg) – Policymakers face the most economically difficult part of the Covid-19 crisis of avoiding the creation of ‘zombie’ companies, according to the Bank for International Settlements.

Ultra-simple monetary and fiscal support is helping businesses avoid a liquidity squeeze after businesses shut down by the pandemic and collapsing demand. But this position carries longer-term risks, said Claudio Borio, head of the Basel-based institution’s monetary and economic department.

“There is a delicate balance to be struck between on the one hand withdrawing it too early, which will unconsciously have short-term costs in terms of economic activity, and withdrawing it too late, which will mean that it will not favor structural adjustments needed, ”he said Monday.

European and US officials have triggered unprecedented easing in response to the Covid-19 epidemic, which has pushed stock markets higher even as economies face their worst recession in decades.

While liquidity measures have helped companies stay afloat, there is concern that they also create a wave of uncompetitive firms that hold back investment and innovation.

“The real challenge is to distinguish between viable and non-viable companies, which, given the uncertainty about future demand trends, is not straightforward,” Borio said.

© 2020 Bloomberg L.P.

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