Public Guarantees for Small Businesses in Italy during COVID-19

This paper assesses the public guarantee scheme for small businesses approved in Italy during the Covid-19 pandemic. In April 2020 the Italian government introduced a free 100% government guarantee on loans below €25.000 that requires no credit approval by banks. Using loan-level data from the Italian guarantee fund, we first show that, between April and June 2020, 620.000 firms (10% of all eligible firms) obtained such guaranteed funds and we find significant bunching at €25.000. Second, we find that the types of firms receiving the guaranteed loans changed during the course of the pandemic. In the initial phase (April and May), firms located in areas more affected by the pandemic or active in 6-digit sectors that were deemed non-essential were more likely to take the new government guaranteed loans compared to all other eligible firms. Moreover, smaller firms, those with less cash on hand, more pre-existing bank debt and lower z-score were more likely to participate in the program. In the second phase (June), as the rate of infections declined and the lockdown measures were eased, funds flowed to areas that were not affected by the pandemic and to firms financially more solid than those who obtained the guarantee in the first phase. This suggests that the pandemic caused large dislocations of economic activity across the country, even in areas that did not experience a health crisis and for firms that were financially stronger. If all eligible firms had participated in the guarantee program, the number of illiquid firms could have been 50% lower in June.