Estimating the COVID-19 cash crunch: Global evidence and policy

In this paper, we investigate how the COVID-19 health crisis could affect the liquidity of
listed firms across 26 countries. We stress-test three liquidity ratios for each firm with full
and partial operating flexibility in two simulated distress scenarios corresponding to drops
in sales of 50% and 75%, respectively. In the most adverse scenario, the average firm with
partial operating flexibility would exhaust its cash holdings in about two years. At that
point, its current liabilities would increase, on average, by eight times, suggesting that
the average firm would have to resort to the debt market to prevent a liquidity crunch.
Moreover, about 1/10th of all sample firms would become illiquid within six months.
Finally, we study two different fiscal policies, tax deferrals and bridge loans, that governments
could implement to mitigate the liquidity risk. Our analysis suggests bridge loans
are more cost-effective to prevent a massive cash crunch.