Europe’s bankruptcy paradox

When Covid-19 first plunged Europe into lockdown last spring, there were plausible predictions of a tidal wave of corporate insolvencies. That hasn’t happened, at least not yet.
The number of companies declaring bankruptcy declined by about a fifth in the euro area last year, even as economic output contracted more than 6%. Firms were saved by overwhelming government support, including hundreds of billions of euros of public loan guarantees, wage subsidies and loan forbearance by banks. Rules were relaxed on when businesses must file for insolvency.
The big question is whether Europe has merely delayed the inevitable by propping up financially distressed enterprises (unkindly dubbed “zombies” by economists), or whether resurgent demand and accelerating vaccination
rates can keep the bankruptcy wave at bay. There’s been more ground for optimism recently but many company failures still look unavoidable.
Leaving aside high-profile implosions, like the ones at budget airline Norwegian Air Shuttle ASA, Topshop owner Arcadia Group and fraudulent fintech Wirecard AG, the recent insolvency trend has been the opposite of what usually happens in a recession.
Compared with the US, where large companies such as car-rental giant Hertz Global Holdings Inc and telecoms provider Frontier Communications Corp had to file for Chapter 11 bankruptcy, some European countries have been especially forgiving.
Germany recorded the smallest number of corporate insolvencies since at least 1999; English and French bankruptcies are the lowest in more than 30 years.
With big parts of the economy left relatively unscathed by the pandemic, interest rates still at rock bottom, consumers ready to spend their pandemic savings and Europe’s 750 billion-euro ($900 billion) Covid recovery fund poised to start disbursements, it’s tempting to think the worst is over.
Policy makers, though, shouldn’t consider the “low number of insolvency filings in Europe as a sign of corporate health,” the European Systemic Risk Board — which oversees the continent’s financial system — has warned. It noted that in a worst-case scenario the current calm might be “the sea retreating before a tsunami.”
Because of government loan guarantees, business failures would also further damage public finances.
That’s one reason France’s President Emmanuel Macron and other leaders are in a hurry to relax lockdown restrictions. Every day of lost revenues deepens the hole from which companies must climb. Genuine zombie businesses — those that were financially distressed before the pandemic but were able to avoid filing for creditor protection last year — will, however, remain in that hole.

—Bloomberg