# **1 Introduction**

During economic crises, governments tend to support struggling firms to survive and recover more quickly by providing financing and assistance to keep workers employed, among other measures. In doing so, they must balance the need to quickly reach broad coverage across firms with the risk of potentially distributing untargeted assistance to firms that do not need help or are too risky. As governments inject credit during crises, or “crisis credit,” and provide benefits to protect employment, they may increase overall private sector indebtedness, leading to financial instability and potential fiscal costs. The consequences of these programs hinge critically on how the benefits are distributed across different types of firms.

In this paper, we analyze how credit guarantee and employment protection programs interact in assisting firms during crisis times, using the context of the COVID-19 pandemic.<sup>1</sup> In particular, we analyze the adoption of those programs by firms with varying risk characteristics and differing exposure to the pandemic, including exposure to the exogenous implementation of mandatory lockdowns over time across municipalities. Moreover, we study the microand macro-level effects of the credit and employment programs on indebtedness and risk, given the equilibrium behavior of firms, banks, and the government. We evaluate the risk to the banking system and the government using both _ex ante_ measures of expected loss (evaluated when the programs are distributed) and _ex post_ default (after the pandemic shock is realized). Finally, we explore how the different conditions of each program and how different counterfactual scenarios affect aggregate indebtedness and risk. Our analysis focuses on the positive, not the normative, aspects of these two programs.

The public credit guarantee program (henceforth, the credit program) implemented in Chile in early 2020 is a large government facility that grants bank credit for 4.6% of gross domestic product (GDP). A concurrent employment insurance program allows firms to cover salaries while employees are not reporting to work due to the pandemic, amounting to 0.62% of GDP.<sup>2</sup> We collect transaction-level information on the universe of bank credit to all firms, including loan applications from firms and corresponding approvals or rejections from banks. Further, we complement this data with information about firms’ use of the employment program. We match the financial data with administrative tax data for the universe of formal

> 1Credit and employment programs are part of a wider array of policies implemented during the COVID-19 pandemic to deal with the crisis. For comprehensive recounts, see Harvard’s Kennedy School, the IMF, Cirera et al. (2021), and Feyen et al. (2021).

> 2Chile’s credit guarantee program is similar to many credit programs implemented in Asia, Europe, and Latin America during the pandemic. For a review of some of those cases, see Anderson et al. (2023) and Hong and Lucas (2023a,b). Those programs differ from the well-known U.S. Paycheck Protection Program (PPP) in that the latter offers loans that effectively convert into grants to firms instead of loan guarantees.

1