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United States: PPP government-guaranteed loans are largely converted into public subsidies

12/3/2021

In response to the Covid-19 pandemic, the US Congress established the Paycheck Protection Program (PPP) in April 2020 to provide loans backed by the Federal government to small and medium-sized enterprises (SME). Several aspects of this programme differ from France’s state-backed loan programme (PGE), especially its fiscal cost. This is mainly due to the forgiveness of PPP loans by the Federal government, even when borrowers remain solvent.

Céline CHOULET

TRANSCRIPT // United States: PPP government-guaranteed loans are largely converted into public subsidies : December 2021

In Spring 2020, to deal with the shock triggered by the COVID-19 pandemic, governments launched special support with government-guaranteed loans. In France, it was called PGE. In the United States, it was PPP, Paycheck Protection Program. The French and American systems have different characteristics regarding in particular borrowing conditions or eligible companies and lenders. In France, for instance, banks took on the whole origination of PGE. In the United States, banks granted only 80% of PPP loans. Non-banking credit businesses and fintech lenders took on the remaining 20%. The main difference between the two systems is the budgetary cost. In France, the Institute of Public Policy has reckoned that, with an average default rate of 5.4%, the net cost of PGE for public finances could be slightly above 3 billion euros. In the United States, even if there is no credit event, the budgetary cost of PPP could reach 790 billion dollars.

There are four factors to explain the difference in scale.

The first one is linked to the total amount of granted loans. In France, just over 140 billion euros in PGE have been allocated.In the United States, around 800 billion dollars in PPP loans, 700 billion euros, were allocated.

The second factor is linked to the sharing of payment defaults. In France, the State is taking on from 70% to 90% of potential losses. French banks are assuming part of the risk. In the United States, the credit risks linked to government-guaranteed loans are wholly assumed by the Federal State.

The third difference lies in a payment by the French borrowing companies of a guarantee fee to the State. In the United States, the Federal State did not take such commissions neither to the borrowers nor to the lenders. They even compensated the lenders for the PPP loans origination costs. The global amount of this operation reached 30 billion dollars.

The last factor, the major one, lies in the fact that, contrary to French PGE, the American PPP loans are convertible, under certain conditions, into public subsidies. The partial or complete cancellation of a loan is subject to the maintenance by the company of its payroll within the eight to twenty-four weeks following the obtaining of a loan.

On November 21st, close to 630 billion dollars in PPP loans have been forgiven. It represents 79% of the total amount granted. The loans subscribed in 2020 are no longer eligible to forgiveness. 93% of the loans granted last year have already been forgiven. American companies could, until September 2022, apply for forgiveness for loans subscribed in 2021. Ultimately, in France, the cost of PGE for public finances will depend on the amount of called guarantee. In the United States, the current trend is forgiveness for almost all the guaranteed loans which were granted.

 

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