Some Companies Are Too Connected to Fail
Policy makers must act now to lower the risk of cascading bankruptcies.
One liquidation can lead to another.
Photographer: Fox Photos/Getty ImagesGiven Covid-19’s reach through the economy, cascading bankruptcies loom as a major threat. These happen when one company’s failure to pay its bills weakens the financial health of another, which in turn undermines the viability of yet another and so on, causing a chain reaction. Economic stress from the present pandemic is far more diffuse than it was during the 2008-2009 crisis, and this time the firms that pose the greatest danger are not limited to the financial sector.
To mitigate this risk, countries need a “too connected to fail” policy — to provide liquidity to companies whose bankruptcies stand to have the largest ripple effects. This is the real economy equivalent of the too-big-to-fail strategy during the last financial crisis.