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IMF: Governments Should Use “Equity-Like” Stimulus

International Monetary Fund chief economist Gita Gopinath has advised governments to implement “equity-like” support instead of loans as firms increasingly become insolvent due to lower revenues over extended periods.

Her reasoning is government support in the form of loans would hurt companies due to the debt, which would be a form of tax. “Because there’s a bigger insolvency issue here, government support would have to shift more towards being equity-like as opposed to debt-like. Otherwise, you would end up with a lot of firms that exit this crisis with a huge amount of debt overhang,” she said. “If the lending takes form more like equity … then that’s less onus on the firms. That will make it easier for firms to recover from the crisis.”

During the late 1990s the Japanese government injected capital into firms via schemes where state-affiliated bodies bought preferred shares issued by these firms. According to Gopinath, the global economic recovery will be “highly uneven and highly uncertain.” Aggressive fiscal and monetary stimulus measures are needed to support economies. She notes that food price inflation has increased in some countries, though consumer inflation will be curbed by job losses and stagnant wages.

“We have more concerns of inflation going too low, rather than inflation going too high,” she said.

In the IMF’s view, the coming depression will be as bad as the 1930s Great Depression. In its latest projections, the IMF expects 2020 global output to shrink 4.9% compared with 3.0% contraction predicted in April.

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