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Where is the wave of corporate insolvency in Europe?

Ivo-Meinert Willrodt / Feb 2022

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The years 2020 and 2021 were extremely turbulent years in recent European economic history. Since two years the European industry is under the Corona Shock. The economic situation was negatively impacted by multiple lockdowns, most recently at the end of 2021, and the breakdown of international supply chains. Added to this were massive uncertainties in the implementation of Corona protection measures and the explosion of case numbers due to the Omicron variant at the end of 2021/beginning of 2022. The economic conditions for companies deteriorated massively from the 1st quarter of 2020 until today and the losses in the national gross domestic products of the European States have still not been made up. Economic momentum is now suffering from this for the second year.

Almost all European States have supported businesses, workers, and industries with a wide variety of extensive national and European aid measures and financing packages, often regardless of whether or not they were severely affected by the Corona-related restrictions. Government borrowing has climbed to new highs and Government financing support continues to be extended. For example, Germany and France each supported with different measures until the end of 2021 their national economies with around 150 billion Euros. In Germany, the state-funded short-time work (so called: Kurzarbeit) was extended again until June 2022.

In addition, short-term national changes were made to insolvency law in almost all European States to forestall a feared wave of insolvencies.

So far, it appears that the measures taken have been highly successful and that, at least in the area of corporate insolvencies, a wave of insolvencies has failed to materialize in almost all European States. Since there has also been no increase in corporate insolvencies after national regulations, such as the suspension of the obligation to file for insolvency in Germany, have been ended, the financial measures taken by the European States and the European Union have probably prevented a wave of corporate insolvencies. On the contrary, there has even been a significant decline in corporate insolvencies within Western Europe of around 28% (change 2019/2020), and this after the number of corporate insolvencies had already fallen to its lowest level in 10 years in 2019, even without Corona.  The decline in 2020 was particularly drastic in France (- 39 %) and Italy (- 28.5 %). In Italy in particular, such a result would not have been expected even before Corona due to the difficult economic situation. However, there was also a decline in corporate insolvencies of around 8% in the Central and Eastern European countries. No final figures are yet available for 2021 for Europe as a whole, but if we look at the development of case numbers in countries such as France and Germany, there has been a further decline in corporate insolvencies in 2021. In Germany, for example, the number of corporate insolvencies fell again to an all-time low of around 14.300 in 2021. In France, there was a further decline of around 10% in 2021. In Spain, the moratorium on the obligation for companies to file for insolvency was extended again until June 14, 2022. However, the feared significant increase has certainly not occurred in Europe.

As has been the case for years, by far the highest number of corporate insolvencies throughout Europe was in the main sectors of the services and trade industries.

The development that has been taking place for years, namely that companies in Western Europe in particular have increasingly higher equity ratios, has had a positive effect on this crisis. The proportion of companies in the EU that had an equity ratio of more than 50 percent increased to around 46 percent in 2019 (before the Corona crisis) compared with the previous year. At the same time, the proportion of companies with a low equity ratio of less than 10 percent decreased further to around 21 percent in Wetsern Europe. These nevertheless very good capital resources, in addition to government financing assistance, is likely to be another reason why companies are currently coming through the Corona crisis so well.

In 2022, the number of corporate insolvencies is likely to be negatively impacted by the significant rise in commodity prices, especially energy prices, and the threat of sanctions against Russia in the event of an invasion of Ukraine. Due to the high equity ratios of European companies, the effects of moderate interest rate increases should only have a minor negative impact. However, it must also be taken into account that the number of corporate insolvencies in Western Europe is currently the lowest in 30 years.

However, the situation is different for consumer insolvencies. In contrast to corporate insolvencies, there has been a considerable increase in cases in Europe in 2021. This is not only due to the fact that the periods after which consumers are debt-free again have been shortened for example in Germany from 6 to 3 years, but also because consumers in general are being hit harder by the Crisis.

In Times of Corona, going bankrupt in Europe hits mainly consumers, rarely companies.

 

Ivo-Meinert Willrodt

Ivo-Meinert Willrodt

February 2022

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