Updates on the economic impact of the coronavirus
Sign up for myFT Daily Digest to be the first to know about news about the economic impact of the coronavirus.
When the number of German companies filing insolvency claims fell in 2019 for the tenth year in a row, Joachim Ponseck expected the tide to turn soon. He’s still waiting.
I predicted a wave of insolvencies for the coming year, ”says Baker McKenzie partner. “Now I’m a lot more careful. “
Other than the blatantly obvious one and a few long-troubled street retailers, virtually no business in Germany went bankrupt during the pandemic. “Right now, companies that are bankrupt are either those that are in extremely desperate situations or those where insolvency is used to implement a pre-defined restructuring plan,” says Petra Brenner, Partner at Ernst & Young.
The result is that 2020 marked a 20-year low for the number of companies filing proceedings.
This is in part due to rule changes implemented by German authorities during the closures.
Before the crisis, German companies were required by law to file for bankruptcy if they ran out of cash. This requirement was suspended during the pandemic.
Yet even after this rule was reintroduced in May, bankruptcies have yet to resume. However, the Kurzarbeit is still in place for many companies – the German equivalent of the UK’s leave scheme, which allows companies to pay excess workers over need out of public funds.
Under this program, many companies are allowed to use the support until the end of this year. But numbers pulling support have already fallen sharply. Munich-based think tank Ifo, which collects monthly figures on Kurzarbeit use, said the number of workers covered by the scheme fell below one million for the first time since the start of the pandemic in August.
There are still 688,000 people covered by the service, the majority of whom work in the hotel industry.
A larger portion of government support may have come from KfW, the national development bank, which pledged to cover part of the banks’ losses on loans to businesses that needed credit during the pandemic. .
“Thanks to the government’s efforts to mitigate the loss and damage caused by anti-Covid measures, money remains cheap. KfW’s support also gives banks the comfort they need to fund struggling businesses, as they say ‘KfW is backing us’, ”says Brenner, who adds that lawmakers may be particularly reluctant to remove support at this time because it does so. would cost jobs. “The elections are approaching. No politician wants to give the impression that the government is failing to secure the homes of ordinary workers, especially as many people have been hit hard by the government’s anti-COVID measures.
Brenner and Ponseck believe that the conditions created by the aggressive monetary easing of the European Central Bank are an important factor in explaining why there has been a dearth of insolvencies.
“It depends on the economic policies of central banks. This has created an environment in which there is easy access to liquidity and banks tend to be lenient, they are more likely to accept breaches of covenants, ”Ponseck explains. “Real estate and stocks are so valued that funds are desperate for affordable investment targets and will invest in anything that moves. ”
“In times of negative interest rates, pension funds, insurance companies and high net worth individuals look for higher returns,” explains Brenner. “The debt funds they invest in compete with the banks to finance the same companies. Debt funds are under investment pressure, in order to obtain their returns, they take risks that a banker would not take.
Ironically, it may only be when conditions improve that the business roster. “Bankruptcies are a lagging indicator, which tend to increase when conditions are already improving,” says Ponseck. “We have to see what the next semester brings. “
One reason for this may be that, as order books fill up, businesses will feel the effects. “With fewer orders, you have to order fewer materials. You are not going to become insolvent because of a lack of liquidity if you don’t really need the money to buy things, ”says Jürgen Erbe, insolvency administrator at Schultze & Braun. “There are issues ahead, we need to see how companies fare in the next half year as order books fill up and bank working capital funding from banks for commodities has to be purchased. ”
Yet few people expect something as dark as feared when the lockdowns first began. “Bankruptcies will increase,” says Erbe. “But it won’t be the end of the world and not as bad as people thought when the pandemic started.”