OECD warns that a ‘wave of bankruptcy’ is threatening the eurozone due to rising interest rates

The OECD warned that a “wave of bankruptcy” could threaten the Eurozone’s economy, as companies used by ultra-low interest rates are now being hit by higher interest rates.

Businesses in Spain are particularly vulnerable to the high debt levels and withdrawal of support from pandemic era.

In some countries, households and businesses are both highly indebted. They are therefore vulnerable to rising financing costs. The OECD warned that high levels of debt among non-financial companies could lead to a wave bankruptcy.

The largest increase in bankruptcy was in the service sectors such as transportation and accommodation, partially reflecting the withdrawal of pandemic assistance.

The OECD urges careful monitoring of housing markets. At the same moment that businesses are under pressure, indebted household are also at risk.

The economists expect growth to be 0.9pc in this year and 1.5pc the following year. This suggests a slower than expected recession.

They said that this was very unusual, because raising interest rates in order to combat inflation would usually cause a recession.

The OECD stated that “looking at the history, it appears there is no precedent post-1950 for a large disinflation induced in the US, Canada or Germany by the central banks, which does not entail a substantial economic sacrifice or a depression.”

“The short-term increase in unemployment is unlikely to coincide with a decrease in inflation.”

The economists emphasized that it was vital to control inflation despite the growth risks, especially since the European Central Bank has only recently begun to address living costs.

The OECD stated that “Monetary Policy needs to remain restrictive till underlying inflationary forces are reduced durably.” Since July 2022, the ECB increased its headline deposit rate from minus 0.5pc to 3.75pc.

Analysts also stated that governments should rein in borrowing, and reduce energy support expenditure to avoid creating additional inflationary pressures.

The report stated that “Fiscal policies must become sufficiently restrictive.”

“Measures taken to alleviate the energy crisis have increased public debt. They must be more targeted, and ultimately withdrawn, even if prices of energy do not continue to fall.”

Already, higher interest rates are biting.

According to the S&P Global Purchasing Managers’ Index, a survey conducted by businesses, the eurozone’s building industry contracted for the 16th consecutive month in August.

The decline in activity has been the most severe so far this calendar year. Housebuilding is particularly affected.

Andrzej szczepaniak, an economist at Nomura, said that “Europe is headed over the precipice of recession” after dire readouts for the manufacturing industry.

He said that the PMI composite output indexes for the eurozone as well as the UK were now in contraction territory. This suggests GDP growth will be negative in both countries in the third-quarter.