Credit insurance:Recession could drive increase in insolvencies

As the coronavirus pandemic pushes the world economy into recession, global GDP is forecast to contract 4.5% year-on-year and global corporate insolvencies are likewise anticipated to increase by 26% in 2020 according to a recent report from credit insurer Atradius.

The insurer also expects to see much higher bankruptcy figures in the second half of 2020. This forecast is based on the assumption of a gradual phasing out of the fiscal stimulus measures as well as a reopening of bankruptcy courts and proceedings. 

While temporary relaxation of insolvency laws ends in either Q2 or Q3 of 2020 for most countries, fiscal measures may be extended throughout 2020 and even well into 2021 but are likely to be phased out as they weigh heavily on the government budget. Atradius notes that all major regions will be confronted with an increase in insolvencies. 

“Across countries, there is a wide range of insolvency projections, depending on the severity of the economic contraction and the insolvency elasticity - the percent responsiveness of insolvencies to a one percent GDP change. This varies across countries due to differences in economic structure and institutional factors, such as type of insolvency regime,” said the report. The lowest increases in insolvencies are said to be found in Europe. 

In Germany, France, Austria, Belgium, Switzerland and Italy, insolvencies are likely to go up by percentages ranging from 6% to 20% given the economic contraction in these countries is generally lower - Belgium and Italy are exceptions – and they have a lower responsiveness of insolvencies to GDP.  Among the economies with large increases in insolvencies are Turkey, the US, Hong Kong and in Europe, Portugal, the Netherlands and Spain. For all of these countries, Atradius expects a sizeable economic contraction that mostly explains the massive increase in insolvencies. 

However, it was also pointed out that there are also country-specific factors that matter. In Turkey and Portugal, the insurer gives a lower weight to the effectiveness of the fiscal response in preventing insolvencies as this has limited focus on providing liquidity to firms. 

In the US, although the recession is not expected to be as deep as in the southern European countries, insolvencies are said to be highly responsive to fluctuations in economic activity.

Source: Asia Insurance Review