As borrowing costs increase and governments remove pandemic-era support measures for businesses worth trillions, corporate bankruptcies in advanced economies are rising at double-digit rate.
Following a decade of decline the number of US bankruptcy rates in Germany, the EU’s largest economy, rose by 25 percent from January to Septembre compared to the same period last year. Destatis, the country’s statistical agency, said that since June “double-digit monthly growth rates were consistently observed in comparison to the previous period”.
Across the bloc, Analysts said that the industries most affected by the increase in insolvency rate were transportation and hospitality.
According to IMF estimates, the government provided massive support to companies and households. The schemes amounted more than $10tn for 2020 and the four first months of 2021. Since then, the government has withdrawn most of these packages.
Shearing warned the trend would continue, as many businesses are expected to refinance their debts at higher rates over the next few months even though central bank rate increases will be forecasted to have peaked.
Analysts say that the surge in bankruptcy filings will have a negative impact on global economic growth and employment in the coming years.
Susannah Streeter is a senior investment analyst with asset manager Hargreaves-Lansdown. She said that although the increase was partially due to the collapse of zombie companies, the concern is that rapid tightening of monetary policy could also push promising start-ups or SMEs over the top, which may have long-term effects for growth.
The rating agency Moody’s believes that the global default rate for speculative grade will continue to rise in 2024, after having reached 4.5 percent in the 12-month period ending in October. This is above the historical average 4.1 percent.
David Hamilton, Moody’s head of research, stated that “credit will either be materially more costly than it is now or simply harder to obtain”.
Moody’s highlighted the recent failure of Rite Aid which operated over 2,300 pharmacies in 17 US states. They also cited the distressed debt swaps between Belgian consumer products company Ideal Standard International, and UK business services group Haya Holdco 2
Allianz, a German financial services firm, forecasted that the global insolvency rate would increase to 10 percent next year after rising 6 percent in 2023.
Maxime Lemerle is the lead analyst at Allianz Research for insolvency.
According to the national statistics offices, in France, Japan and the Netherlands, bankruptcy rates were up by more than 30% compared to October last year. The Paris-based OECD, a group of mostly wealthy nations, recently reported that corporate bankruptcy rates in some countries have exceeded those during the global financial crisis 2008-09. This includes Nordic nations Denmark and Sweden as well as Finland.
According to the Insolvency Service, the insolvencies in England and Wales for the period January-September also reached their highest level since 2009.
Allianz has warned that the sectors with high labour intensity, such as hospitality, transport and retail, have been hardest hit. Allianz said that industries more susceptible to interest rate increases, like real estate and construction were also expected to be affected.
Analysts said that energy subsidies and other measures could help many businesses stay afloat. This would mean the peak of insolvencies is unlikely to be quite as high as previous corporate downturns.
When rates were low, many businesses secured financing at cheap rates and built up good cash reserves. Global economic growth is expected to continue and unemployment rates in large economies are at historically low levels.
He said: “We don’t say that we face a tsunami insolvencies.”
Analysts added that bankruptcy numbers in the US, Germany, and France are still modest by historical standards.