Federal Reserve Bank of Atlanta President Raphael Bostic said many U.S. businesses will struggle as early as next month to survive amid coronavirus-related shutdowns and urged both governments and banks to provide relief quickly to help prevent widespread failures.
“What we are hearing from our contacts is that May is going to loom as a large month, in terms of the transition of concern from this being a liquidity issue -- one where we are really talking about cash flows -- to this perhaps translating and transferring into a solvency issue, and whether companies can exist at all,” Bostic said Wednesday via videoconference to civic groups in Birmingham, Alabama.
The Fed is moving aggressively to try to provide a lending bridge during the crisis, Bostic said. The central bank pledged as much as $2.3 trillion in lending, while cutting interest rates to near zero, including expanding its credit in unprecedented ways such as loans to state and local governments and purchases of so-called junk bonds -- those with lower than investment-grade ratings.
While the goal has been to ensure the economy resembles its pre-crisis state, that wouldn’t be possible if businesses are shuttered en masse, Bostic said. Much will depend on the health-care policy response and how quickly American workers and businesses feel confident they can return to work, he said.
“What we are seeing and hearing is credit challenges are becoming more widespread and more acute, and as that happens solvency becomes more into play,” Bostic said. “There are wide swaths of the economy seeing significant drops in demand, so the cash flows are so low they are eating through whatever savings they had at a more accelerated pace.”
The Fed and other regulators have made it clear to banks that lenders will not be penalized if they restructure loans to provide help to otherwise successful businesses threatened by virus shutdowns, Bostic said.
Aid such as the Paycheck Protection Program for small business may need to be distributed quickly even if there are fewer immediate controls, and more careful audits can be added later, he added.
“Time is not our friend,” Bostic said. “The goal is really to get as many key companies as possible to still be around at the end.”
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