The insolvency time bomb: prepare for a record-high increase in insolvencies, the collateral damage of the Covid-19 crisis

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The Covid-19 crisis will trigger a major acceleration in business insolvencies due to both the suddenness and historic size of the economic shock and its expected lasting effects, according to a new study by Euler Hermes, the world’s largest trade credit insurer. These lasting effects are critical for companies that were already the most fragile before the crisis and are now among the sectors hit the hardest by measures to contain the pandemic (transportation, automotive, non-essential retail, hotels and restaurants).

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) as the global economy faces a U-shaped recovery from the Covid-19 crisis. This would represent a +16 percent  year-on-year CAGR over the two-year period, similar to the intensity recorded on average amid the 2008 financial crisis.

Bulk of insolvencies to be recorded between H2 2020 and H1 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.

However, countries will see asymmetric trajectories over 2020 and 2021 due to uneven initial conditions, as well as differing strategies of emerging from lockdowns and different emergency policy measures, in particular regarding temporary changes in insolvency frameworks. Two out of three countries will post a stronger rise in insolvencies in 2020 than in 2021 – notably the U.S., Brazil, China, Spain and Italy – while one out of three would record an acceleration in 2021 – notably India, the UK, France and to a lesser extent, Germany.

“So far, government interventions to prevent a liquidity crunch for corporates, including tax deferrals, state loans and guarantees, wage subsidies and debt moratoriums, have helped limit the immediate translation of the Covid-19 shock into official insolvencies in many countries. But if this policy relief is withdrawn too fast, we expect the increase in insolvencies to be +5 to +10pp higher,” says Maxime Lemerle, Head of Sector and Insolvency Research at Euler Hermes. “At the same time, prolonging support for too long could prop up ‘zombie’ companies, increasing insolvency risk in the medium to long term.”

Euler Hermes Global Insolvency Index and regional indices (yearly change in percent)

euler hermes global insolvency index 2020 2021
Sources: National Statistics, Solunion, Euler Hermes, Allianz Research

About Euler Hermes

Euler Hermes is the global leader in trade credit insurance and a recognized specialist in the areas of surety, collections, structured trade credit and political risk. Our proprietary intelligence network analyses daily changes in corporate solvency representing 92 percent of global GDP. We give companies the confidence to trade, and be paid. We compensate your company in the event of a bad debt, but more importantly, we help you avoid bad debt in the first place. Whenever we provide trade credit insurance or other finance solutions, our priority is predictive protection. But, when the unexpected arrives, our AA credit rating means we have the resources, backed by Allianz to provide compensation to maintain your business. Headquartered in Paris, Euler Hermes is present in 50+ countries with 5,800 employees. In 2019, our consolidated turnover was 2.9 billion euros and insured global business transactions represented 950 billion euros in exposure.

The Allianz Group is one of the world's leading insurers and asset managers with more than 100 million retail and corporate customers in more than 70 countries. Allianz customers benefit from a broad range of personal and corporate insurance services, ranging from property, life and health insurance to assistance services to credit insurance and global business insurance. Allianz is one of the world’s largest investors, managing around 766 billion euros on behalf of its insurance customers. Furthermore, our asset managers PIMCO and Allianz Global Investors manage 1.7 trillion euros of third-party assets. Thanks to our systematic integration of ecological and social criteria in our business processes and investment decisions, we hold the leading position for insurers in the Dow Jones Sustainability Index. In 2019, over 147,000 employees achieved total revenues of 142 billion euros and an operating profit of 11.9 billion euros for the group.

These assessments are, as always, subject to the disclaimer provided below.

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Sophy Hunter
Euler Hermes Group
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