Europe faces bankruptcy ‘tsunami’

The eurozone is at risk of a “tsunami” of bankruptcies as Covid life-support schemes for businesses are wound up, regulators have warned.

A report by the EU’s key risk watchdog, which is chaired by European Central Bank president Christine Lagarde, said that companies may struggle to stay solvent the longer they relied on emergency financial support.

A report by the EU’s key risk watchdog, which is chaired by European Central Bank president Christine Lagarde, said that companies may struggle to stay solvent the longer they relied on emergency financial support.Credit:Bloomberg

This could cause debt to accumulate, increasing the risk of a pent-up wave of insolvencies, it warned.

Companies in the bloc have claimed a total of €1.5 trillion ($2.3 trillion) in grants, tax deferrals and loans during the pandemic, the European Systemic Risk Board (ESRB) said.

The report said: “In a worst-case scenario, the postponed insolvencies would suddenly materialise and trigger a recessionary dynamic, potentially causing further insolvencies. The current low rate of insolvencies would then be similar to the sea retreating before a tsunami.”

The number of bankruptcies across Europe fell by almost 20 per cent between July and September last year, compared with before the pandemic.

The ESRB suggests the spike in corporate failures could cripple the region’s banks as a rise in loan defaults impairs their ability to fund the recovery, and could even undermine the European project itself.

But the ESRB cited forecasts from Allianz and Euler Hermes predicting a 32 per cent jump in insolvencies across western Europe this year and an even bigger 34 per cent rise in central and eastern Europe as the support measures are rolled back.

The gloomy message echoes research from Bank of America on “ghost bankruptcies” warning that more than 200,000 companies across France, Germany, Spain and Italy are under threat when the lifelines are withdrawn.

The ESRB suggests the spike in corporate failures could cripple the region’s banks as a rise in loan defaults impairs their ability to fund the recovery, and could even undermine the European project itself.

It added: “If rising insolvencies undermine the capacity of some member states to recover from the Covid-19 shock and lead to a deterioration in the asset quality of the countries’ banking sectors, it may result in political and economic instability which could spill over to the rest of the European Union.”

Countries need to channel resources to viable companies – potentially through converting loans and guarantees into grants under expanded state aid rules – while using efficient insolvency procedures to avoid a glut of “zombie” companies, the ESRB said.

Telegraph, London

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