Economic issues in Switzerland, in the age of coronavirus

The Federal Council has acted swiftly to help the economy after the imposed lockdown on all non-essential activities in Switzerland, introducing two main measures: indemnities to support the workforce, and loans to businesses to avoid bankruptcies. The latter, however, are raising a series of questions about the impact on the behaviour of firms and whether the inevitable defaults will have a ripple effect in the economy. Professor Mario Jametti, Director of the USI Institute of Economics, in a short video sheds some light on this issue and on the current debate in the country.

Last week, Federal Councillor Ueli Maurer, who heads the Federal Department of Finance, claimed to expect about 10% defaults on the government-backed loans to businesses in the aftermath of the lockdown. “Mr. Maurer’s statement might be overly optimistic”, says Prof. Jametti. “If we put that into a broader context, we’re talking about over 10.000 firms defaulting due to the crisis, which is more or less the number of businesses that fold in a full year of normal economic activity, and which means that in this situation we would end up with twice as many bankruptcies and, consequently, a multiple of layoffs in the workforce”.

The subject of the government-backed business loans is a hot topic among academics and practitioners. The issue at stake is how to deal with the defaults on these loans (which are, in fact, credit lines granted through overdraft checking accounts), which at the end would be borne by the Federal government: should the unrepayable loans be cancelled, or forfeited? According to Prof. Jametti, “some criteria should be established, for at least three reasons. First, we should avoid uncontrolled bankruptcies, with firms suddenly defaulting on their debt, leading to ripple effects in the economy. Second, we should avoid seeing each individual firm going to the government asking to renegotiate their loan, which would be not only a bureaucratic nightmare, but also it would create disparity between companies (who gets what, and how much). Third, we should analyse the impact of these looming credits on the investment behavior of firms, which would be crucial for the reboot of their activity”.