Description

We study the distribution of credit during crisis times and its impact on leverage and risk at the firm and macroeconomic levels. We analyze a large-scale COVID-19 public credit guarantee program in Chile, using novel transaction-level credit data matched with tax data. We find that demand drives the increase in leverage, especially for riskier firms, but several factors keep aggregate risk small. Aggregate risk increases substantially when credit limits are relaxed, but reallocating the existing program credit toward riskier firms or raising the expected default increases risk much less. A quantitative model of firms and endogenous default confirms our empirics.