Coronavirus: The Crisis Has Entered a Phase of Default

The chain of payments is already broken: debtors have decided not to pay their accrued debts; deferred checks have been returned for insufficient funds; and most companies are not producing goods or services and their invoicing is “zero”.

Published in El Cronista on April 31, 2020
As a consequence of the quarantine, 80% of the economy is paralyzed, and most indicators show that consumption has declined to almost incredible levels. Retail enterprises, freelancers and the self-employed have no sustainable income levels. In other words, everything has collapsed, and now there is the threat that the month of April may lead to a general state of paralysis, without production, without invoicing, without sales, without payments and without collection.

It is no secret that the lockdown is incompatible with the economic activity. If quarantine is observed, lives are saved; if the economy is protected, companies are saved.

This is a dilemma that is difficult to solve if we do not consider the intrinsic value of the legally protected interests under the National Constitution; and here the rights to human life and health go against the right to work and engage in any licit industry.

Some of the actions taken by the Executive are causing partial or antagonistic effects.

Loans at reduced interest rates for employers to pay wages double their liabilities because later on they will have to repay the loan plus the accrued new wages while their invoicing remains “zero”. Extending deadlines for social security contributions also doubles their payment on the expiration month while their activity level has not returned to normal or reasonable yet. These phenomena in a stable economy are somehow justified and amid the pandemic they do not resolve the crux of the matter, but rather they aggravate it.

The extended quarantine and the scenario in April, May and June pose a dilemma for companies who need to do what they have to do now to make it until July with a minimum surviving activity that may allow them to rebound

and start growing again from a basement level, of course. Crisis committees do not design plans for the next twenty days but for the rest of the year as the short run, and then put the medium and long term into perspective.

Even essential businesses are undergoing all kinds of difficulties. More than 40% of their staff stays home because they are at-risk groups or because they have to care for their children while schools are closed. There is also a 15% absenteeism rate aggravated by pandemic sensitivity. As a matter of fact, more than a half of company personnel are on paid leave. The ones who can work are producing with double expenses and under complicated operational conditions, with serious issues to collect debts and difficulties to access loans.

As to freight transportation, truck drivers are doing an amazingly hard work: they leave with their fully loaded trucks to supply essential products to the most remote places, and return with their trucks empty. Gas oil has to be paid in cash, salaries as well, and profitability is negative. Companies are struggling in quicksand, sinking deeper with each operation.

Companies with fewer than 100 workers that are not operating account for more than 75% in the most diverse industries. Some of them have been trying to be declared “essential services” but the truth is that even when they resume business, less than 20% of their clients have reached them, as compared to pre-quarantine levels. Only 20% of companies have been able to get soft credits, and just a handful of them can join REPRO (Productive Recovery Program) and receive allowances.

In other words, we have fallen into a cataleptic state, which particularly affects the most vulnerable activities, especially those that have not been able to invoice for almost one month, with minimum activity level threatened by bankruptcy. The question is what else can be done in the two remaining months of quarantine, and how can they go back to normal in the second half of 2020.

It goes without saying that those who are taking advantage of the needs of the community as a whole are to be condemned, together with loan sharks, business pirates, abusing manufacturers or suppliers of essential products, basic food, hygiene and sanitizing products, and in particular medical and health care supplies that are imposing abusive or exorbitant prices. Usury in times of need due to the pandemic has absolutely no ethical justification and should be widely condemned.

The State should step in and pay wages, beyond its initial partial concessions, finding a mechanism because April will be a month with a sharp fall in income but in May the situation will become terminal. By then this inactivity may drive a large number of companies into bankruptcy, and SMEs will be simply gone.

In fact, it is crucial for companies to make it until June/July with a minimum surviving activity level, as if they have been hibernating, to kick-start their business and reactivate under reasonable surviving conditions. Loans and extended deadlines are not enough; the State must forgive debts and pay total wages to inactive employees, as other badly hit countries by the pandemic have done.