Companies on the drip – this is how bad the situation would be without government intervention

The number of corporate bankruptcies fell by 15.5% in Corona Year 2020 compared to the previous year. How can this be? The credit insurer Coface has simulated in a study what the true extent would have been without government intervention. We dissected the complex of issues piece by piece together with Coface economist Christiane von Berg.

Deserted stores in the inner cities. Desperate small business owners who have been waiting for months for aid money. Shopkeepers who are using up their savings reserves. Meanwhile, there is no shortage of economic horror scenarios. For Christiane von Berg, an economist at credit insurer Coface, the fact that the number of insolvencies fell by 15.5% in 2020 compared with the previous year is “against all economic understanding” – but explainable. After all, the true extent of the crisis would be much greater without government support measures. This is the result of a Coface study on which the economist worked. One of the study’s findings is that if government aid such as short-time work were factored out, the number of insolvencies would have risen by 9 percent instead of falling.

The fact that appearances are deceptive also becomes clear when looking at the economic damage. It is expected to be €44.1 billion in 2020. In previous years, the damage was only more serious in 2009 (€73.1 billion). The risk of bad debt will continue to hang over the German corporate landscape like a sword of Damocles in 2021.

The sectors

For its study, Coface looked at the six sectors of construction, retail, manufacturing, tourism, business services and transport and logistics (including passenger transport), as this is where – not only during the crisis – 80% of all insolvencies usually occur. Here, the degree to which they are affected is quite different: while tourism has suffered badly since the start of the pandemic, manufacturing and logistics were hit harder in the first lockdown. “Demand from the most important export countries for Germany was lower in the first lockdown, but now the roads are full again,” says Christiane von Berg. Consumers have now adjusted to e-commerce, she adds. The manufacturing industry is also producing at pre-crisis levels again, after the introduction of hygiene measures, among other things, had slowed production during the first lockdown. Passenger transport, on the other hand, is suffering from the travel restrictions in a similar way to tourism.

The insolvency model

Included in Coface’s calculation: Sales development and support measures (direct subsidies, short-time work) minus costs (for example, personnel) divided by total debt.

The state

As an economist, Christiane von Berg feels that the state’s aid interventions through short-time work, KfW loans or the suspension of the obligation to file for insolvency until the end of April are too strong, but adds a “but”. In this difficult situation, he says, the state does not have all the information it needs to make the best possible decision: What is the business model of the company in question? How high is its liquidity? How exactly do the measures of short-time work and bridge assistance work? With many uncertain factors, a model can only be built very roughly. Moreover, it is not possible to tailor the measures to each company individually, he said. “So these are actions with a sledgehammer,” says the economist. Of course, she would like him to use a small hammer and chisel to apply the measures in a company-specific way. But, “Better too much than too little.” Moreover, she says, Germany has gotten off lightly in terms of economic performance and quality of life. While there was the worst recession in this country in 2020 since 2009, the economic downturn in other countries was the worst since 1946.

The zombies

Warnings have been sounded since government aid was installed about so-called zombie companies that would no longer be viable without support. Christiane von Berg says that “zombies” are very difficult to identify. It is true that there are estimates from the Bundesbank. It is also possible to logically deduce approximately where the zombie companies are located. However, a precise localization would only take place if, for example, there were another crisis without support measures. Even the end of the suspension of the obligation to file for insolvency on May 1 would not necessarily bring clarity, says the Coface economist. This has been shown by the example of France, where a comparable scenario did not result in more insolvencies at the end of August. In addition: In the lockdown, there are fewer court dates available. Accordingly, the figures are distorted by this organizational dilemma.

The factors

For Christiane von Berg, the progress of the vaccination campaign is both and thus essential for a sustainable contour recovery. It is true that there was a strong upswing in the third quarter of 2020. However, the subsequent lockdown has wiped this out. “The important thing now is to achieve herd immunity as quickly as possible so that we don’t keep falling back into stop-&-go,” the economist says. Other factors include China and the U.S., as the German economy depends heavily on manufacturing, which in turn depends on exports to the aforementioned industrialized nations, she said. “The fact that China has the pandemic well under control and the U.S. is already very far along in vaccinating has saved the first quarter of 2021 for the manufacturing sector in Germany in particular,” says Christiane von Berg. The fact that the U.S. has more freedom as a result of the vaccination also has a positive effect on consumption.

Christiane von Berg ist Chef-Volkswirtin beim Kreditversicherer Coface.

The countries

Insolvency growth is not comparable between countries. A 9% increase in bankruptcies in Germany is completely different from 19% in Spain. Insolvency law and the corporate landscape are different, he said. Countries with a strong startup scene tend to be more vulnerable than a static corporate landscape like in Germany. Christiane von Berg advises that insolvencies should always be viewed in their historical context within a country. In addition, while insolvency is always a painful drama for the company in question, from an overall economic perspective, insolvencies would have to be viewed in a differentiated manner. The damage caused by bad debts can vary just as much as the loss of jobs.

The future

For February and March, the Federal Statistical Office recorded an increase in regular insolvencies, i.e. applications received by the court. Christiane von Berg speaks of an increase of roughly 30% compared to the previous month. This is an early indicator that insolvencies are now on the rise and that there will be a catch-up effect. The figure for March 2021 is already higher than the March 2020 figure, but it is difficult to predict how bad things will really get in the end. The economist assumes that support measures such as bridge assistance, child allowances, the reduction in value-added tax or subsidies for the culture and events sectors have had an effect.

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