[ad_1]
The prolonged suspension of insolvency proceedings sounded the alarm bells that it masked the credit risk of maturity that could break the wave of bankruptcies after the moratorium ends. It can also lead to a cohort of “zombie” companies that stifle investment and innovation and weaken the economy.
“It was the right tool in the acute phase of the coronavirus crisis,” said Ulrich Keil, founder of the insolvency registry Insolvex. “But there is a high risk that there will be many ‘zombie’ companies if it expands.”
The moratorium on bankruptcy for companies affected by the coronavirus will last until the end of the year, while Germany’s enhanced part-time Kurzarbeit program will continue in 2021.
Across Europe, this support has saved a number of businesses and jobs, but the challenge for countries now is how to balance that protection. The aid helps nonviable companies survive by delaying the restructuring necessary to keep the economy globally competitive. It can also destroy opportunities for currently insolvent companies, which still have their place in today’s business world.
While the German Chamber of Commerce and Industry, or DIHK, welcomed the insolvency ruling, it also noted that there was “growing concern that protracted insolvency was fueling dangerous chain reactions.”
In the case of Germany, some problems go beyond the cyclical nature. Even before the pandemic, several companies struggled to implement a deeper restructuring, especially in the crucial auto industry.
“Governments now have a difficult balance to strike,” said Paul Donovan, chief global economist at UBS Wealth Management. – In the long term, it is profitable to preserve jobs in viable companies. It is economically inefficient to preserve jobs in companies that are unlikely to withstand the structural changes of the fourth industrial revolution. “
Along with loan and credit guarantees, tax deferrals and aid to cover wage costs, the suspension of the German insolvency process has helped companies in need survive in recent months. One in five companies is at risk of bankruptcy due to a pandemic, according to a recent Ifo survey.
Debt registrar Creditreform forecast in mid-August that bankruptcies would rise about 20% this year, more than during the 2008 financial crisis, although the extension of the new insolvency measure could lower that number.
Prolonging the performance of ailing companies can also have an impact on payments along the business chain. Suppliers, especially those representing the chemical and commodity industries, faced delays in paying bills in the first half of the year.
In response to questions from Bloomberg reporters, the German Justice Ministry said there was no reason to worry about late payments, noting that the moratorium differentiated between insolvent and over-indebted companies.
There are political elements in any decision, especially in the run-up to the 2021 elections. The state of the economy and business, employment rates will play a large role in the campaign.
“Bankruptcies can very quickly lead to a crisis of confidence,” said Christoph Niering, director of the German Association of Insolvency Administrators, or VID. “If their volumes increase and if they fall at the same time, it could undermine confidence, especially if larger companies and suppliers are also affected.”
[ad_2]
