Did Targeting Financial Constraints During COVID-19 Make Sense?

Following the experience of the 2008-2009 financial crisis, governments around the world extended large-scale liquidity and credit programs at the onset of the COVID-19 crisis with the aim of hindering waves of defaults and mass layoffs (aka, bazooka lending). But does focusing on firms' credit constraints make sense in crises that do not originate from a shock to the financial-sector? In a new large-scale survey of beliefs and plans of German firms during the COVID-19 crisis combined with administrative data, firms identify pessimistic and uncertain beliefs about future demand, rather than current or future credit constraints, as the main impediment for their business. Demand-driven uncertainty is also what limits firms' demand for credit. Firms predominantly rely on retained earnings to finance their operations. Those who access external financing do so largely through regular commercial loans rather than loans guaranteed by government programs. Firms that apply for government-guaranteed loans are more likely to display zombie features.