October 1, 2020

Germany Extends Insolvency Delay to Prevent Wave of Bankruptcies

Correspondent in Berlin



In economic jargon they are known as “Zombie companies”. They are companies that can no longer meet their payments or debts (cash flow insolvency), or that have reached a situation in which total liabilities exceed total assets (balance sheet insolvency), so according to the legislation German have the obligation to declare bankruptcy. But among the exceptional measures to curb the economic effects of the pandemic, the German government allowed them to be exempt from this obligation until the end of September, with the hope that the rest of the aid, such as the rescue packages, the regulation of reduced working hours, VAT reduction or tax exemptions, help during this time to promote his recovery.

The fact is, experts expect a wave of bankruptcies in october, as soon as the exception period expires, and the grand coalition has decided to extend it.

The Minister of Finance, Olaf Scholz, has advanced that his Social Democratic Party (SPD) and the conservative block Chancellor Angela Merkel have already sealed a compromise that will be announced after the meeting held by the grand coalition this afternoon. The Minister of Justice, Christine Lambrecht, has suggested for her part that the moratorium could be extended until the end of March 2021Although the CDU has deemed that period dangerous and it has been insisted that the exemption should expire at the end of this year.

«In the first half of the year, bankruptcies decreased 8%compared to the same period last year, ”reports Patrik-Ludwig Hantzsch of the credit benchmark agency Creditreform. The German Statistical Office, which has more data, even expects a 30% decrease at the end of July. But that market distortion it can take a big toll on the German economy.

“If no company goes bankrupt, that basically means that there is no longer a distinction between good and bad models business, which will undoubtedly cause problems for ‘healthy’ companies, ”according to Hantzsch. Deutsche Bank Research has also warned that such “zombie companies” are targeting «Aggressive pricing policies that put pressure on the profit margins of healthy companies and hamper structural change in general. ‘

On the other hand, if companies are allowed to default on a massive scale, the effect would be severe on banks. «The banks are creditors of these companies, so there is a risk of a banking crisis occurring again “, defends Klaus-Heiner Röhl, from the Institute of German Economics. According to a survey carried out in June by the German institute for economic research Ifo, a fifth of German companies considered their survival threatened due to the coronavirus crisis.

Germany has already established exceptions to the insolvency rule, so that, the company that has a plan to overcome the pandemic approved by the regulator can continue with its activity and has relaxed some payment rules during periods of suspension of activity. In addition, new bank loans granted during the suspension period, as well as the secured guarantee that they enjoy, are better protected, since they cannot be called into question in a subsequent insolvency.

This has been able to motivate banks to lend money. Too risk for contractual counterparties has been reduced from a struggling business, such as suppliers, owners and lessors, who must be paid even if restructuring efforts fail. When he made the decision to postpone insolvencies until SeptemberThe German government had an estimated 29,000 corporate bankruptcies for this year. In September, Creditreform estimates that around 550,000 companies will have great difficulties or will be in a precarious situation.

This dilemma is not unique to Germany. Companies around the world have been under extraordinary pressure from the pandemic and many states are wondering how to avoid a cascading effect. Euler Hermes, an international specialist in credit insurance, predicts that most of the business insolvencies caused by the covid-19 crisis will be registered, between end of 2020 and first half of 2021.

Before the COVID-19 crisis broke out, in fact, Euler Hermes already foresaw a increase in global trade insolvencies for the fourth consecutive year in 2020, as a result of a moderate pace of economic growth and trade disputes. Foresee that the global bad debt ratio increases by 35% in 2021 and expects the largest increases in the United States (+ 57%), Brazil (+45%), United Kingdom (+43%), Spain (41%) and China (+40%).

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