Potential Liquidity Stress in Sweden during the Pandemic

The Covid-19 pandemic threated squeezing companies’ liquidity as cash inflows fell with the sudden drop in sales and cash got locked up, for instance in inventories. At the same time, companies still had to service their payment obligations, with trade credit exposures We examine the potential for liquidity stress due to cross-exposures in key parts of non-financial corporations and firms that can occur in the face of adverse and asymmetric aggregate demand and supply shocks. Companies are exposed to these differently depending on their activity, level of human interaction, degree of automation and digitalisation, integration in vulnerable (cross-border) supply chains, and, crucially, their access to finance. We take the case of Sweden, where such corporate asymmetric cross-exposures are relatively large in an EU perspective. For this purpose, we develop a new indicator of potential liquidity stress with an assessment of possible cascading effects across sectors using an input-output framework to gauge the risk of liquidity shortages in the most directly affected branches rippling through the supply chain. We conclude that potential for liquidity stress and significant cascading effects was present at the onset of the Covid-19 pandemic but that forceful policy action prevented such risks from materialising, However, we argue that part of the pass-through via such financial cross-exposures might happen with a delay as policy support is withdrawn, and/or as new major disturbances hit the economy.