Liquidity-Saving through Obligation-Clearing and Mutual Credit: An Effective Monetary Innovation for SMEs in Times of Crisis

Tomaž Fleischman,Paolo Dini,Giuseppe Littera

doi:10.3390/jrfm13120295

Abstract

During financial crises, liquidity tends to become scarce, a problem that disproportionately affects small companies. This paper shows that obligation-clearing is a very effective liquidity-saving method for providing relief in the trade credit market and, therefore, on the supply-side or productive part of the economy. The paper also demonstrates that when used in conjunction with a complementary currency system such as mutual credit as a liquidity source the effectiveness of obligation-clearing can be doubled. Real data from the Sardex mutual credit system show a reduction of net internal debt of the obligation network of approximately 25% when obligation-clearing is used by itself and of 50% when it is used together with mutual credit. These instruments are also relevant from the point of view of risk mitigation for lenders, based in part on the information on individual companies that the mutual credit circuit manager can provide to banks (upon the circuit member’s request) and in part on the relief that liquidity-saving provides especially to NPL companies. The paper concludes by outlining recommendations for how even greater savings could be achieved by including the tax authority as another node in the obligation network.

Highlights

The economic impact of the Covid-19 health emergency highlights the need for extraordinary tools for government intervention in fiscal and monetary policy
These instruments are relevant from the point of view of risk mitigation for lenders, based in part on the information on individual companies that the mutual credit circuit manager can provide to banks and in part on the relief that liquidity-saving provides especially to non-performing loans (NPLs) companies
The introduction of an Liquidity-saving mechanisms (LSMs) generates positive externalities. With this recommendation, the present paper argues that complementary currencies (CCs) provide a very significant benefit when used in conjunction with an obligation-clearing LSM in trade credit systems

Summary

Introduction

The economic impact of the Covid-19 health emergency highlights the need for extraordinary tools for government intervention in fiscal and monetary policy. As argued by Simmons et al (2020), even more targeted cash outlays than helicopter drops are needed, even while many countries have sent cash to employers as long as they did not fire their employees, to the self-employed, or even to every citizen as in the case of the US. These are helpful short-term measures, but cannot be sustained for more than a few months due to the huge impact on the deficit and public debt. This paper argues that liquidity-saving through obligation-clearing provides a remarkably effective and instantaneous relief mechanism that is felt strongly by the supply side, especially if tax obligations are included

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