International Development Law Organization

Insolvency and COVID-19 – a crisis within a crisis

13 Aug 2020

As countries around the world struggle to manage the impact of the COVID-19 crisis, the economic fallout of the pandemic is becoming increasingly severe. Emerging economies are particularly strained by the consequences of the pandemic, given their often limited fiscal and institutional capacities. In this context of economic hardship, business failure and plummeting levels of investment, the issue of insolvency has emerged as a key policy and regulatory challenge.

On 2 July, leading experts from International Financial Institutions and academia provided examples of current policy responses and emerging practices of dealing with insolvencies in the context of the pandemic at an online conference organized by IDLO in collaboration with the Centre for Commercial Law Studies (CCLS) at Queen Mary University London. Titled “Rethinking Insolvency and Crisis Management in Light of the COVID-19 Crisis,” the conference discussed the macroeconomic effects of the COVID-19 crisis, as well as concrete solutions to insolvency and restructuring in emerging markets. Speakers included senior representatives from the International Monetary Fund (IMF), the World Bank and the European Bank for Reconstruction and Development (EBRD), in addition to representatives from Queen Mary University and IDLO. John Taylor, International Advisor to CCLS and former General Counsel of EBRD, moderated the discussion.

“The COVID-19 crisis has been described as a crisis like no other and the response has also been like no other,” remarked Ender Emre, Counsel at the Legal Department of the IMF. Mr. Emre provided an  overview of the main tools and policy measures adopted by governments and central banks to tackle the economic impact of the pandemic and underlined the importance of a variable toolbox which includes debt moratoria, large-scale fiscal support schemes such as credit guarantees, as well as measures to address liquidity strains in key funding markets.

Marco Bodellini, Associate Lecturer in Banking and Financial Law at Queen Mary University, addressed the impact of COVID-19 on the banking sector and the importance of effective bank crisis management regimes and tailored mitigation strategies. Mr. Bodellini went on to highlight the difficulties currently faced by banks, including the deterioration in the risk profile of many borrowers such as home-owners unable to repay mortgages. Pamela Lintner, Senior Financial Sector Specialist at the World Bank, concluded the first panel with a presentation on the legal aspects of bail-in versus bail-out in handling problem banks in the context of the crisis.

Turning to insolvency management of non-financial institutions, Catherine Bridge-Zoller of EBRD remarked: “We don’t know how long this crisis will last and this is going to determine how severe the global recession is over the coming years.” Describing how the pandemic had affected both developed and developing countries, she added: “It’s clear that emerging markets have much more limited fiscal capacity to deal with the crisis and to inject the funds that are necessary to prop up businesses and the wider economy.”

Ms. Bridge-Zoller went on to provide examples of insolvency law amendments being adopted in developed economies such as Australia, Germany, the United Kingdom and the United States, as well as blanket measures introduced in emerging markets such as Turkey and Hungary.  She highlighted the risk of such countries turning inwards and becoming more protectionist in an attempt to protect their economies.

Margarita Meldon, IDLO Regional Manager for Eastern Europe and Central Asia, presented a case study from Armenia, a country which has been hit particularly hard by the pandemic during a period of otherwise robust economic growth. She underlined that strengthening the resilience of justice institutions should be a key priority for countries seeking to recover from the pandemic and working to implement the 2030 Agenda for Sustainable Development.

More than 60 participants from ten different countries in eastern Europe and Central Asia, as well as from Austria, Italy and the UK, took part in the online discussion. A recording of the event is available at this link.