THE CALM BEFORE THE STORM: COVID-19 CREATED A CORPORATE INSOLVENCY TIME BOMB

  • Covid-19 created a veritable insolvency time bomb – Euler Hermes expects that most insolvency cases are yet to come, mainly between the end of 2020 and the first half of 2021
  • As a result, the Global Insolvency Index is likely to reach a record level, rising by +35% by 2021
  • 2/3 of countries will experience the peak of insolvency growth still in the current year, 2020, while the remaining countries, especially European ones (including France, the United Kingdom, to some extent Germany, Poland) will see a significant increase in the number of bankruptcies in 2021
  • Premature withdrawal of political support measures could worsen the situation, increasing the growth in the number of insolvencies from +5 percentage points to +10 percentage points

Even in the current period, as economies emerge from full lockdown, Euler Hermes expects that most insolvency cases are yet to come, mainly between the end of 2020 and the first half of 2021, as a result of uneven starting conditions, as well as different strategies for resuming production and the extraordinary policy measures taken, in particular regarding the reporting of insolvency (temporary changes to bankruptcy systems, other forms of debtor protection – giving them more time and flexibility to act). The Global Insolvency Index is likely to reach a record level, rising by +35% by 2021, cumulatively over the two-year period, with half of the countries recording a new record since the 2009 financial crisis.

Global insolvency record in 2021

The Global Insolvency Index will reach in 2020 the level we last observed in 2009, only to then reach a new record in 2021. For half of the countries, this result will be the highest since the financial crisis. This applies to European countries (France, Italy, Spain, Belgium, the Scandinavian countries), but also to emerging markets (China, Brazil, Russia, Turkey, Poland). The main exceptions should be the United States, Japan and Germany.

Where is the situation most serious?

Where is the situation most serious? The largest increases will be recorded by the United States (+57% by 2021 compared to 2019), Brazil (+45%), China (+40%) and major European countries such as the United Kingdom (+43%), Spain (+41%), Italy (+27%), Belgium (+26%), France (+25%) – and Poland accordingly +24%.

Crisis is a matter of time – when will the wave of insolvencies arrive?

However, policymakers must now maintain a delicate balance: premature withdrawal of support measures could increase the growth in the number of insolvencies by +5 percentage points to as much as 10 percentage points. And if the global economic recovery takes longer than expected, the increase could be even stronger, by +50 percentage points to 60 percentage points. Introducing additional aid measures or extending existing support for businesses could limit insolvencies in the short term, but also support “zombie” companies (i.e. those existing only thanks to an external drip feed, with no prospects), increasing the risk of more insolvencies in the medium and long term.
Change in the number of insolvencies in 2021 (2021 level compared with 2019 in %)

Crisis is a matter of time – when will it arrive? — illustration 1

Sources: national statistical data, Solunion, Euler Hermes, Allianz Research

 

Summary

Euler Hermes warns that the Covid-19 pandemic has created a corporate insolvency time bomb. The Global Insolvency Index will rise by 35% by 2021, reaching a record level, and in half of the countries the result will be the highest since the 2009 financial crisis. The largest increases will be recorded by the United States (57%), Brazil (45%) and China (40%), and in Europe, among others, the United Kingdom (43%) and France (25%). Poland will struggle with an increase of 24%. Policymakers must maintain a balance – premature withdrawal of support could deepen the crisis by 5–10 percentage points, but prolonged aid will entrench “zombie” companies.