run-up to the pandemic, and new lending in recent years had already stalled as a result
of efforts to clean up the balance-sheets of state banks.
Since the onset of the pandemic, a range of policies has been introduced by
governments across the world to provide liquidity to the many businesses that have
been shuttered during the lockdowns and to support households hit by a sudden loss of
income and employment. Grace periods in the repayment of existing loans have been
granted. Re-contracting of loans in favour of longer maturities or lower interest rates
has also been common. The hope is that because the health crisis is temporary, the
financial distress of firms and households will be, too. However, even with a prompt
resolution of the pandemic in the form of a globally available vaccine, significant
damage has been inflicted on the global economy and the balance-sheets of financial
institutions.
Given the emergency, these policies have provided a valuable stimulus tool beyond the
conventional scope of fiscal and monetary policy. But by 2021 grace periods will come
to an end and it will become apparent whether the problem facing countless firms and
households is insolvency rather than illiquidity. An extended credit crunch has been a
major headwind to economic recovery in the past. There is little to suggest that it will be
different in the post-pandemic landscape.
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