Which businesses should governments bail out during COVID-19?
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As countries around the world continue to relax their COVID-19 stay-at-home orders, industries are itching to get sectors of the economy back up and running.
While the big question that remains is whether it all can be done safely, having a steady stream of revenue is crucial to business survival.
Airlines have asked their national governments for financial assistance after lockdowns halted travel. Restaurants, hotels and shops in the hospitality and leisure sectors have warned about their ability to weather the crisis. Even Shakespeare’s Globe theater in London said this week it risks permanent closure if it isn’t able to receive emergency government funding to make up from lost revenue during the lockdown, which began in March.
The speed at which governments are having to decide which companies to offer assistance to has echoes of the 2008 financial crisis. Back then, officials rushed to create rescue programs for big banks deemed systemically important to the financial industry, and therefore, effectively, too big to fail.
Now, the same question is facing governments on many continents, but this time, the problem is hitting far more industries and impacting a much larger number of companies. It’s an issue Lord Paul Myners, who played a key role in the United Kingdom’s response to the 2008 financial crisis, predicts will lead to governments taking stakes in far more companies.
“The government has said that it will do whatever is necessary,” Myners told the BBC’s Victoria Craig on the global edition of “Marketplace Morning Report.”
For airlines and the hospitality industry, Myners said, they’re looking at “three winters in a row” in terms of how slow business is and has been.
“They have no alternative. The banks will only support them up to a point,” he said. “So they have to turn to government. Government is the lender of last resort, the insurer of last resort and probably the owner of last resort.”
The following is an edited version of the conversation.
Victoria Craig: This is a fairly unprecedented situation. The government has never really needed to be involved in industries in this way before has it?
Lord Paul Myners: Well, immediately after the Second World War, there was a program of nationalization, which took things like the railways and the coal industry and shipbuilding and telecoms into public ownership. But that was a period of socialism in the feelings of the post-war period. And since then, we’ve been reversing it.
But when you lend money to somebody, you only have a certain number of alternatives if the person cannot repay, and a lot of the people who borrowed money in the government schemes can’t repay, they’ll never be able to pay. So what happens in that situation? The government either writes off the debt or it does what we call in banking a debt for equity swap. It says ‘OK, we will relinquish the amount you owe us, but we’ll take a shareholding in your business.” I can foresee the government or government agencies becoming quite significant shareholders across a wide swath of British companies.
Craig: And the government does have experience with this, as it did in the last financial crisis with some of the banks, like [the Royal Bank of Scotland]?
Myners: Yeah, I think that was rather different. These were huge companies. They were simple business models. What we’re talking about now is government having its ownership fingers on probably all types of business imaginable. So the government’s going to have to work out how it’s going to look after those companies. And the obvious answer to me is they create a number of funds, they put these investments into funds, and then they bring in industrialists, commercial companies, private equity, to manage each of these funds in a competitive way, but with a government setting down the guidelines, which is not just about
squeezing as much cash out of these businesses as you can, but actually running them in responsible ways.
Craig: During the last financial crisis, there was a sort of ethical question about the merits of the “too-big-to-fail” banks and the decisions to bail those companies out. How does the government, in this case, how would it decide who to save? And who not to save?
Myners: That’s a very important question. The government’s going to have to work with those companies and decide which ones are strong enough to survive, which ones can never survive and which really have a bright future. And so we’ve got to keep questioning about the functions of certain businesses. The progressive decline in bricks-and-mortar retail, to be replaced by online, will be accelerated by this. So the government needs to think about, are we propping up viable businesses? Or are we just deferring the inevitable death of other businesses? A government doesn’t have the skill to do that.
Craig: Is there time to do this because, you know, we’re working on a day by day basis. You know, we see all these developments coming out and businesses asking for help. The government’s kind of working in real time to figure this stuff out, isn’t it?
Myners: It is. And we’ve seen that in some of the government programs, which didn’t work at first. The initial lending schemes to business did not have the effect that was required and had to be rewritten. But yeah, we’re making things up as we go along. I was a government minister in the Treasury during the global financial crisis. And that’s what we had to do. You’re not given a lot of time here, and you will make mistakes. But the government doesn’t have any other options. It is there, ultimately, as the final risk-taker. But I would urge government to reach out to experienced, wise people to come in and help them. I’m sure there are a lot of people out there who would say, “If I could help here, if there’s a role, where I could use my skills to help the government manage through this crisis,” some really good people would come forward.
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