The Covid-19 crisis will trigger a major wave in business insolvencies due to both the suddenness and historic size of the economic shock and its expected lasting effects. The World Bank has forecasted that more than 90% of economies will experience contractions this year, higher than the rate seen at the height of the Great Depression. As new waves of the coronavirus keep planes from flying and curb consumer spending, pressures on the global economy are increasing.
At a global level, Euler Hermes’ insolvency index is expected to surge to a record high of +35 percent cumulated over a two-year period (after +17 percent in 2020 and +16 percent in 2021). Unlike in 2007-2009, all regions and countries are expected to post double-digit increases in insolvencies, with the biggest surges seen in North America (+56 percent by the end of 2021), followed by Central and Eastern Europe (+35 percent) and Latin America (+33 percent). In Asia, Euler Hermes expects an increase of +31 percent by 2021, and in Western Europe +32 percent.
Edward I. Altman, the creator of the Z-score, a widely used method of predicting business insolvencies, estimated that this year will easily set a record for so-called mega bankruptcies — filings by companies with $1 billion or more in debt (49). More than 30 American companies with liabilities exceeding $1 billion have already filed for Chapter 11 since the start of January, and that number is likely to top 66. And he expects about 200 bankruptcies — at least $100 million — to challenge the record set the year after the 2008 economic crisis (242).
Bloomberg reports that corporations raised a record $2.1 trillion in bonds this year, with about half of that coming from the United States. The speed and magnitude of the increase in corporate debt this year poses various risks to an already fragile global economic outlook. Companies are doing the opposite of what they should be doing, which is to de-leverage as the banks did after the global financial crisis of 2008, Altman said. „When there is an increase in insolvency risk, what you do not need is more debt. You need less debt.“
Patrick Swayze: Point Break by Kathryn Bigelow, 1991
nytimes.com, Mary Williams Walsh, 03.08.2020
allianz.com, Paris, 20.07.2020
eulerhermes.com, Maxime Lemerle, 16.07.2020
bloomberg.com, Denise Wee, 15.07.2020