Firm liquidity and solvency under the Covid-19 lockdown in France

We simulate the impact of the Covid-19 crisis on corporate solvency using a sample of around one million French nonfinancial companies, assuming they minimize their production costs in the context of a sharp drop in demand. We find that the lockdown triggers an unprecedented increase in the share of illiquid and insolvent firms, with the former more than doubling relative to a No- Covid scenario (growing from 3.8% to more than 10%) and insolvencies increasing by 80% (from 1.8% to 3.2%). The crisis has a heterogeneous effect across sectors, firm size, and region. Sectors such as hotels and restaurants, household services, and construction are the most vulnerable, while wholesale and retail trade, and manufacturing are more resilient. Micro-firms and large businesses are more likely to face solvency issues, whereas SMEs and medium-large firms display lower insolvency rates. The furlough scheme put forward by the government (activité partielle) has been very effective in limiting the number of insolvencies, reducing it by more than 1 percentage point (approximately 12,000 firms in our sample). This crisis will also have an impact on the overall efficiency of the French economic system, as market selection appears to be less efficient during crisis periods relative to "normal times": in fact, the fraction of very productive firms that are insolvent significantly increases in the aftermath of the lockdown. This provides a rationale for policy interventions aimed at supporting efficient, viable, yet illiquid firms weathering the storm. We evaluate the cost of such a scheme aimed at strengthening firms' financial health to around 8 billion euros.