Debt Expansion as "Relief and Rescue" at the Time of the Covid-19 Pandemic: Insights from the Legal Theory of Finance

I. Introduction

The outbreak of the Covid-19 pandemic has led to a public health crisis of widespread contagion. As such, lockdowns have been imposed in many countries to limit face-to-face social interaction, thereby severely impacting economic activity and workplaces.¹ The United Kingdom (UK) was "locked down" between March 23 and July 4, 2020, which resulted in the freezing of business activity for many sectors, such as brick-and-mortar retail (except groceries and pharmacies), travel and leisure, restaurants, public services, and service-based industries affected by social distancing such as transport, work-sharing facilities, leisure, hospitality, etc. Although many sectors have reopened since early July, the risks to public health have not subsided and emergency local lockdowns are being reimposed.² It is estimated that economic output has been reduced in the UK by at least 20% compared to the same period last year.³ Gross domestic product was reduced by 9.5% in the United States (US) in the second quarter of 2020.⁴

The financial implications of economic lockdown in so many sectors were immediate, as the corporate sector is heavily financialized.⁵ The freezing of business activity in hard-hit sectors has implications for their cash flow, servicing of debt, solvency, and market-valuation and credit-rating assessments. The economic woes for corporations inevitably affect households as redundancies have been gradually announced⁶ and wider macroeconomic uncertainties affect household income and welfare.⁷

Besides public finance packages for emergency help, such as furloughing⁸ and paycheck protection,⁹ policy makers have turned to private-sector finance to alleviate the financial stress and hardships caused to households and corporations during the pandemic. Private-sector finance is being relied on—to a significant extent, but not exclusively—to meet the policy goals of "relief" and "rescue." "Relief" refers to the policy goal of giving corporations and households temporary release from the pressures of debt which would be exacerbated in the weak economic conditions during the pandemic. "Rescue" refers to the policy of facilitating the access of corporations to finance to keep them afloat in relation to expenses, losses, and shoring up capital for the future. The upshot of relief and rescue policies is that debt expansion, or the carrying of increased debt burdens for corporations and households, has been adopted as a key policy response to the financial woes of corporations and households during the pandemic. These policies are not dissimilar to those undertaken in many countries.¹⁰

The legal implementation of relief and rescue policies in the US, UK, and European Union (EU) involves legal and regulatory suspensions to facilitate a level of debt expansion that would normally have been limited by the operation of microprudential regulation for lenders and contractual constraints in debt arrangements. Further, the legalization of extraordinary fiscal and monetary policies has been carried out. This episode reflects how law and regulation have been made elastic in order to address crisis management and social needs.¹¹ Reis and Vasconcelos argue that such elasticity is institutionally supported based on the expected macroeconomic behavior of agents in markets.¹² Empirical evidence also offers support for the ex post efficiency and welfare effects of certain suspensions, particularly in private law agreements such as debt moratoria.¹³ Carruthers characterizes contractual suspensions as "financial decommodification," which is necessary when markets are temporarily dysfunctional.¹⁴

We situate the policies for relief and rescue within the theorization of legal elasticity in Pistor's legal theory of finance.¹⁵ This theorization, drawn largely from observations during the global financial crisis of 2007-09,¹⁶ offers a path for structural reforms in law and regulation as part of post-crisis management.¹⁷ In particular, such theorization allows us to critically query the alleged temporary nature of the legal and regulatory suspensions during the pandemic. The theoretical insight drawn is that legal elasticity is often more structural in nature and will have to continue to apply to mitigate...