Credit

Can the $2T Fiscal Stimulus Stave Off a US Recession?

March 26, 2020

2 Trillion $ in fiscal stimulus is being crafted to mitigate the US recession

As coronavirus cases continue to rise globally, most governments and private sector companies are adopting stringent social distancing measures, with concerns regarding the attendant economic damage continuing to build. US economic activity is expected to contract sharply in the remainder of March and throughout April as virus fears lead consumers and businesses to continue to cut back on spending such as travel, entertainment, and restaurant meals and supply chains are ground to a halt.

Several large investment banks are forecasting US GDP to decline 5%-24% in 2Q20 with a recovery in late 2020. Recovery in 2H2020 is predicated on the pace with which social distancing and seasonally higher temperatures reduce community transmissions, in conjunction with the size of fiscal stimulus.

While the initial response from developed economies including the USA was slow, over the last few days – policymakers have provided a significant monetary and fiscal boost to the economy. While US Congress and President Trump have announced measures aggregating to 1% of GDP since early March, US Congress is preparing a fiscal boost that may be far more significant – up to 9.3% of GDP. For perspective, the entire fiscal boost in the 2008-09 Great recession amounted to about 5.5% of GDP.

Fiscal measures targeting businesses

Small business loans/payroll subsidy-Paycheck protection program ($377 B/ 1.8% of GDP)

  • Liberalize lending standards under the Small Business Administration’s (SBA) 7(a) lending program allowing firms with up to 500 employees to receive loans equal to 2.5 months average payments for payroll, rent, and other debt obligations (up to $10MM per firm).
  • The program would dedicate up to $350 B  (1.7% of GDP) to forgive the amount of the loan used to finance payroll from February 15 to June 30, 2020, prorated by the share of employees retained during that period.
  • This proposal would be retroactive to February 15, to help bring workers who may have already been laid off back onto payrolls. 
  • The loans would be originated by existing SBA certified lenders (Lenders earn fee of 5%) but the SBA guarantee would increase from 75% to 100% of the loan amount.
  • The cost of participation in the program would be reduced for both borrowers and lenders by providing fee waivers, an automatic deferment of payments for one year, no prepayment penalties and zero percent risk weight for lenders who retain the loans on balance sheet.
  • The program would dedicate up to $300 B (1.5% of GDP) to forgive loan balances used to finance payroll from March 1 to June 30, 2020, as long as firms continue to pay workers at least 75% of their normal pay.
  • It also provides $17 B for the SBA to cover six months of principal, interest, and fees for small businesses with SBA loans granted before the COVID-19 outbreak- and provide $10 B in emergency grants to small businesses.     

Industry focused relief ($500 B/ 2.4%of GDP)

This includes:

  • Relief for affected industries of $46 B (loans or loan guarantees of $25 B to airlines, $4 B to air cargo, $17 B for "national security” industries-possibly aerospace industry)
  •  $454 B (2.2% of GDP) for loans, loan guarantees, and investments in support of the Fed’s lending facilities to eligible businesses, states, and municipalities (Treasury has been covering about 10% of the financing offered by the Fed, which means the $454 B from Treasury could help generate more than $4 Trillion in new credit).

Restrictions on loan recipients

  • Loans need to be sufficiently secured or made at an interest rate that reflects the risk of the loan; duration of the loan shall be as short as possible and shall not exceed 5 years; borrowers cannot engage in stock buybacks or pay dividends until the loan is no longer outstanding or one year after the date of the loan; and borrowers must, until Sept 30, maintain 90% of its employment level as of March 24 through September 2020. 
  • The recipient will also not outsource or offshore jobs for the term of the loan plus an additional two years; will not abrogate existing collective bargaining agreements for the term of the loan plus an additional two years; and must remain neutral in any union organizing effort for the term of the loan.
  • The Treasury is required to seek stock warrants or an equity interest in the company or, if not publicly traded, senior debt. Unlike the small business program, none of the loans under this program would be forgiven in any circumstance.

Specific measures targeting Hospitals that are at center of Covid-19 epidemic (~$130 B, 0.6% GDP)

  • Roughly $117 billion allocated for hospitals (AHA estimate) 
  • $100 billion emergency fund to reimburse healthcare providers for expenses or lost revenues related to the COVID-19 pandemic.
  • 20 percent bump in Medicare payments for treating patients with the virus.

Tax relief for businesses

  • A delay of payment of certain employer and self-employment payroll taxes for the period running from enactment through the end of 2020. This obligation to pay 2020 tax would be deferred in part until 2021 and in part until 2022.
  • A refundable employee retention payroll tax credit (generally equal to 50% of an employee’s wages up to $10,000) for qualifying employers that have had to fully or partially suspend operations or that have experienced a significant decline in gross receipts related to COVID-19. 
  • The legislation would also allow businesses to carry back net operating losses (NOLs) up to five years to offset profits from prior years, which would generate cash refunds of prior taxes paid. This, along with several other policy changes in the legislation would temporarily liberalize policies that became more restrictive following the enactment of the 2017 tax reform law.
  • Temporary changes to the limitations on loss rules for partnerships and sole-proprietors.
  • Speed up refunds of corporate alternative minimum tax (AMT) credits.
  • Temporary relaxation of the section 163(j) limitation of interest deductions to 50% of adjusted taxable income-instead of current 30% limit.
  • A number of technical corrections to provisions in the 2017 tax law (“Tax Cuts and Jobs Act”).
  • Various health-related provisions, including provisions relating to telehealth as well as inclusion of certain over-the-counter medical products as qualified medical expenses for purposes of health savings account rules.

Fiscal measures targeting individuals

Payments to individuals (~$250 B, 1.2% of GDP)

  • The bill provides a $1200 rebate to taxpayers ($2400 in the case of a joint tax return) with incomes up to $75,000 ($150,000 joint).
  • The credit phases out for additional income up to $99,000 ($198,000 joint) based on the 2018 tax return.
  • It also provides a $500 rebate for each child.
  • The bill does not set a date for when the rebates will be sent but says they will occur “as rapidly as possible.” This is most likely to occur by late April.

Expanded unemployment insurance (~$250 B/1.2% of GDP):

  • Extend period for receipt of unemployment insurance benefits to 39 weeks rather than the standard 26 weeks
  • Increased benefit amount. The bill would add $600 to the standard weekly benefit amount, which is normally equal to roughly half of the worker's prior weekly pay. With average weekly wages across all sectors of roughly $1,200, this would equate to full wage replacement, on average.

Tax measures for individuals

  • Rebates of up to $1,200 for single filers and $2,400 for joint filers (with amounts increased by $500 per child). These payments are subject to phase-outs beginning at $75,000 / $150,000 adjusted gross income (AGI) for single filers / joint filers.
  • A delay of the April 15 filing date for 2019 returns until July 15. Also, a delay in estimated tax payments otherwise due from date of enactment until October 15, 2020.
  • A waiver of the early withdrawal penalty for certain coronavirus-related withdrawals from qualified retirement plans.
  • Allowance of up to $300 of charitable deductions for non-itemizing taxpayers for tax years beginning in 2020 and relaxation of the limitations for those taxpayers who itemize.
  • A temporary income tax exclusion for those individuals who receive student loan repayment benefits from their employers.

Fiscal measures targeting financial institutions

Aforementioned measures targeting businesses and individuals impact financial institutions through role in credit delivery and impact on credit performance.
  • Temporary Relief for Community Banks - Requires regulators to temporarily reduce the Community Bank Leverage Ratio (CBLR) for community banks from 9% to 8%, and provide for areas on able grace period if a community bank’s CBLR falls below the prescribed level. Expires at the earlier of December 31 or when the national emergency declaration is terminated.
  • Temporary Relief from Troubled Debt Restructurings - A financial institution may elect to suspend requirements under GAAP for loan modifications related to the coronavirus pandemic.  Such election may begin on March 1 and last no later than 60 days after the lifting of the national emergency.
  • Optional Temporary Relief from Current Expected Credit Loss - An insured depository institution has the option to temporarily delay measuring credit losses on financial instruments under the new CECL methodology.  Such option to delay expires at the earlier of December 31 or the date on which the national emergency declaration is terminated.
  • Foreclosure Moratorium and Consumer Right to Request Forbearance-  Prohibits foreclosures on all federally-backed mortgage loans for a 60-day period beginning March 18.   Provides up to 180 days of forbearance for borrowers of a federally-backed mortgage loan who have experienced a financial hardship related to COVID-19. Includes mortgages purchased by FNM and FRE, insured by HUD, VA, or USDA, or directly made by USDA. This terminates on the earlier of the termination date of the national emergency or December 31.
  • Forbearance of Residential Mortgage Loan Payments for Multifamily Properties with Federally Backed Loans - Provides up to 90 days of forbearance for multifamily borrowers with a federally backed multifamily mortgage loan who have experienced a financial hardship. Borrowers receiving forbearance may not evict or charge late fees to tenants for the duration of the forbearance period. Applicable mortgages include loans to real property designed for 5 or more families that are purchased, insured, or assisted by FNM, FRE, or HUD. Terminates on the earlier of the termination date of the national emergency or December 31.
  • Temporary Moratorium on Eviction Filings - For 120 days beginning on the date of enactment, landlords are prohibited from initiating legal action to recover possession of a rental unit or to charge fees, penalties, or other charges to the tenant related to such nonpayment of rent where the landlord’s mortgage on that property is insured, guaranteed, supplemented, protected, or assisted in any way by HUD, FNM, FRE, the rural housing voucher program, or the Violence Against Women Act of 1994.

Fiscal measures targeting states and other Federal spending

State fiscal aid (approx. $150 B /0.7% of GDP)

  • The bill provides $150 B to state and local governments to shore up their fiscal positions. This comes in addition to roughly $50 B (annualized) in increased payments to state governments through the Medicaid program, which was included in Phase 2 legislation.
  • This amount is equal to 6-7% of normal state and local spending, which totals around $3 trillion per year.
  • States and municipalities generate roughly $650 B in sales and excise taxes, and another $450 B in income taxes, all of which look likely to decline temporarily as a result of the partial shutdown of economic activity.

Federal spending ($200bn/~1% of GDP)

  • $45 B for FEMA, $25 B in grants to public transportation systems, $10 B in grants to airports, $31 B in grants to public education systems, $10 B in block grants to states, and $19 B in funding for the Veteran's Affairs (VA) Administration.

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