A simple method to estimate firms liquidity needs during the Covid-19 crisis with an application to Italy

We propose a simple method based on firms’ financial statements and sectoral predictions of sales growth to determine the firms that will become illiquid month by month as the Covid-19 crisis unfolds. We apply the method to the population of Italian incorporated businesses focusing on the period from March 2020 to the end of the year. We find that at the peak, around 200,000 companies employing 3.3 million workers become illiquid. The liquidity shortage, defined as the aggregate “negative” liquidity stock of illiquid firms, amounts to €72 billion by the end of the year. We evaluate the Italian government Liquidity Decree, which provides guarantees for bank loans: almost all firms are able to cover their liquidity shortfalls but the issue is the speed of implementations. Overall, we conclude that even taking into account the second wave after the summer, which increases the liquidity shortfall substantially, firms’ liquidity needs are manageable under the schemes of liquidity provision described in the Decree.