Abstract The coronavirus (COVID-19) pandemic halted economic activity worldwide, hurting firms and pushing many of them toward bankruptcy. This paper discusses four central issues that have emerged in the academic and policy debates related to firm financing during the downturn. First, the economic crisis triggered by the pandemic is radically different from past crises, with important consequences for optimal policy responses. Second, it is important to preserve firms' relationships with key stakeholders (e.g., workers, suppliers, customers, and creditors) to avoid inefficient bankruptcies and long-term detrimental economic effects. Third, firms can benefit from "hibernation," incurring the minimum bare expenses necessary to withstand the pandemic while using credit to remain alive until the crisis subdues. Fourth, the existing legal and regulatory infrastructure is ill-equipped to deal with an exogenous systemic shock like a pandemic. Financial sector policies can help channel credit to firms, but they are hard to implement and entail different trade-offs. Conclusion Because governments have limited resources, they need to prioritize which policies to pursue when trying to save firms from collapsing during the COVID-19 pandemic, at the same time that they evaluate their trade-offs. This is not easy to achieve given the urgency of the needs and the speed at which decisions must be made. Nevertheless, it is worth keeping several considerations in mind when designing different policy responses. For example, policy makers need to make decisions on how much to allocate to large firms versus SMEs, to firms that have relationships that are more 16 difficult to reconstruct, or to firms that would be more disruptive for value chains if they were to go bankrupt. They might even be pushed to decide whether some essential industries (such as basic infrastructure, health, and education) or industries hit hardest by the shock (such as travel, tourism, and other services) are worth assisting over others. Furthermore, policy makers need to determine how much they condition the assistance on keeping certain relationships over others. For example, governments are usually keen on forcing firms to keep workers on their payroll, while avoiding payments to shareholders. However, determining which relationships are more valuable than others for different firms is not trivial. Governments also need to think about how to allocate resources over time. Firms might be in hibernation and need funds for several months, using bridge financing to make it through the lockdown period. During this critical time, government assistance might be needed the most, as banks and investors face higher uncertainty about the length of the pandemic and the related probability of firm survival. Eventually, surviving firms will need additional lines of credit to restart or jump-start their operations when they stop hibernating. Private lenders might be more willing to lend at that stage when uncertainty has diminished and they would be in a better position to assess firms' prospects and credit risks. The scope for policy action implies stark differences between developed and developing countries, as well as among countries within each group. Their different initial conditions determine the set of policies they are able to implement and at which cost (Hausmann, 2020; Loayza and Pennings, 2020). Countries with underdeveloped financial markets, less fiscal slack, and more constrained central banks will face greater challenges to channel credit to firms so as to avoid a breakup in their relationships. Nonetheless, many developing countries have banking systems that they could use to channel credit to firms and tools to assist banks if they face funding difficulties at a later stage. Moreover, the fact that developing countries generally have more informal firms might help them reestablish relationships faster once the lockdown measures are eased. These informal firms might be better targeted through programs that assist households, which can use some forms of personal loans. Moreover, pressure from households and firms with fewer resources in developing countries could make the lockdown period shorter, triggering a higher rate of infection and more rapid herd immunity, at a tragically higher mortality rate, but requiring fewer resources for the quicker hibernation phase. With the rise in global risk, developing countries have also faced a sudden stop in capital inflows, higher costs to issue new debt in capital markets, and sharp depreciations of their domestic currencies. These significant macroeconomic challenges, combined with the large financing needs that arise from the pandemic shock, could trigger widespread sovereign debt restructurings (Blanchard, 2020; Gourinchas and Hsieh, 2020). In turn, they could be followed by widespread turbulence in the corporate sector, especially in countries where firms entered the shock with high outstanding debt levels. The liquidity issues in developing countries might thus rapidly turn into solvency problems-both at the firm and country levels. Multilateral pol17 icy action, involving international financial institutions and creditor countries, might help resolve a problem that can become common across developing countries. Lastly, in designing policies for both developed and developing countries, it is useful to acknowledge the transfers that policy actions produce across different agents of the economy. The lockdown policies will tend to protect the more vulnerable older generation, while restricting the economic activities of the younger generation, which has a lower risk of becoming seriously ill. This effectively induces transfers from the young to the old, given that some of the costs of such policies will not necessarily be recovered (Reis, 2020). Policies to keep firms alive, however, do not produce the same type of intergenerational transfers. Whereas they will be paid mostly by the young, that same generation will also benefit the most from keeping firms alive during the pandemic. Within the young generation, the socialization of losses still entails transfers. Those that have the resources to survive the lockdown without public assistance will in effect subsidize those that receive such help.

Question 1 (15 Marks)

Given the transitory nature of the shock, a good option might be hibernation: slowing the economy until the pandemic is brought under control, while using fiscal policy to compensate for some of the many losses that the economy needs to withstand. Critically discuss the activities that characterised firm hibernation as a result of the fall-out due to the Covid-19 pandemic.