Figuring out which companies to save and which to let die will be a key challenge facing governments after the pandemic, according to a G30 report released today.
The report sketches out a difficult post-pandemic economic environment in which firms must try to dig out from massive debt levels built up to survive the downturn.
Once massive fiscal support programs run out, the group of international economists fears a solvency crisis.
The G30 is a private forum of financiers, economists and current and former policymakers who meet behind closed doors to discuss global economic issues.
"We're not in any way saying we know the size of the problem," said Raghuram Rajan, a former Reserve Bank of India governor now at the University of Chicago who oversaw the report.
"It's been disguised by a lot of the extensive support that's in place."
Former European Central Bank Chief Mario Draghi, who also coordinated the report, said there have been relatively few insolvencies so far because "the flow of money is actually masking an underlying reality."
The report seeks to guide governments on how to avoid providing vital resources to companies that are ill-situated for the post-pandemic world and to instead "adapt to new business realities."
This includes encouraging "necessary or desireable business transformations" in sectors that are increasingly digitising.
The report also recommends a rethink of bankruptcy laws for places where current protocols make it difficult for debt-laden firms to survive even if they have a viable strategy.
"At the heart of the challenge is the fact that while the current crisis is producing a much larger number of firms with sound underlying business models but unsound balance sheets, most jurisdictions have insolvency procedures that essentially assume a firm with an unsound balance sheet is a structurally unsound business," the report said.
The report also urged a broad shift in financing structure towards equity rather than debt, adding that governments could establish policies to encourage balance sheet restructures, or take equity themselves.
"Properly structured, these government initiatives can generate substantial investment earnings to partially or fully offset the cost of the incentives or the losses governments incur from firms that collapse," the report said.