The paradox of corporate insolvency in Europe: miracle and mirage

A paradox is emerging between the deterioration in the financial health of companies and the decline in insolvencies, according to the latest studies by Coface, a leading player in credit insurance. Coface's simulation shows that the decrease in failures suggests that they were reported rather than prevented, they are called “missing failures”. So there are some non-viable businesses whose bankruptcy is only a matter of time.

A similar trend in the main euro area countries

In France, the fate of 22.000 companies remains in suspense: these “missing” failures should materialize gradually by 2022. Coface estimates the number of “missing” failures at 8.600 in the construction sector, 1.800 in retail, 1.500 in manufacturing, 1.200 in business services and nearly 800 in transport. So far, although the economic crisis has affected sectors unevenly, the number of failures has fallen in all sectors, including those that have been shut down for several months. Likewise, all of the French regions recorded a sharp drop in the number of insolvencies in 2020, ranging from -34% in Brittany to -49% in Corsica. In France, without the Solidarity Fund, the operating income of the accommodation and catering sector would have contracted by a percentage estimated at -109%, instead of the -17% estimated by Coface. The repercussions in terms of jobs were still limited, with 126.000 jobs affected by defaults over the year, the lowest level since 2006.

In Germany, Coface estimates the number of missing failures at 21% of their 2019 level (i.e. around 3950 failures). While at the start of the pandemic, Coface anticipated an increase in insolvencies of 9% over 2020, they ended up falling by 15%. This result is partly due to the fact that the German government has temporarily suspended the obligation to initiate insolvency proceedings (default moratorium) to give the support measures time to take effect. Germany's metallurgy and automotive sectors, both in recession since well before the pandemic, saw an increase in insolvencies compared to 2019.

In Spain, the partial unemployment program has proven to be effective. For example, in retail, Coface's simulations indicate that the partial unemployment scheme limited the fall in profits to -26% in the second quarter, against a -67% in its absence. These measures have now not prevented a meteoric rise in insolvencies in the tourism sector of 90% year-on-year in the second half of 2020. Spain's missing insolvencies are estimated to be around 1600 (34% of their 2019 level). .

Finally, in Italy, Coface estimates the size of missing failures at around 39% of their 2019 level (i.e. 4.100 failures). According to the group's simulation, failures should have increased by 7%.

Worrisome outlook

However, not all “missing” failures are expected to materialize in 2021. The continuity of the insolvency moratoria as well as that of aid measures and bank support will be decisive.

The process of "catching up" to failures from 2021 will directly correlate with how quickly restrictive measures come to an end, which itself stems from the speed of vaccinations. It will then depend on the willingness of the State to continue to provide its support, especially since the vast majority of companies will only start (for example, in France) to repay loans guaranteed by the State (PGE). from 2022.

The entire study is available at this address.