Bankruptcies in 2020
During 2020, the number of corporate bankruptcy filings in most advanced economies – members of the OECD – fell by 17% relative to 2019, and by even more relative to previous years. This decline in bankruptcy cases demonstrates the success of the initial COVID-19 response measures. In the US, bankruptcy filings fell by 16% relative to last year; in Japan and Germany the falls are 7% and 13%, respectively; in Canada and the UK, bankruptcies fell by around a quarter. The largest decline is in Australia and France (40%), while Poland is the only country that shows no change relative to 2019. But have these COVID-19 policies kept insolvent firms alive? Should we expect a wave of bankruptcies once government support is withdrawn?
As COVID rages, bankruptcy cases fall
By: Simeon Djankov, Eva (Yiwen) Zhang – LSE, Peterson Institute
What happens in 2021 once government support expires?
In this paper, Gourinchas et al. construct a model-based estimate of a firm’s cash flow under COVID-19 by solving a short-run cost minimization problem subject to a combination of sectoral and aggregate, supply and demand shocks. They use 2018 small and medium sized enterprises (SME) revenue, labor and material costs, along with cash balances and financial expenses from firms in 13 countries – Belgium, Czech Republic, Finland, France, Greece, Hungary, Italy, Poland, Portugal, Romania, Slovakia, Slovenia, and Spain.
[W]e do not find that policies implemented in 2020, on their own, create a 2021 “time bomb” for SMEs. Even if pandemic loans come due, business failures remain modest, and so do policy costs. By contrast, we find significant exposure to the risk of a credit contraction. Such a contraction would disproportionately impact “strong” firms (i.e. firms that otherwise would not need fiscal support to survive COVID-19 in 2020). Even in that scenario, the large business failures would not arise from excessively generous 2020 policies that just delayed the inevitable. Instead, they would be a new blow, coming from the contraction of credit to the corporate sector.
COVID-19 and SMEs: A 2021 “Time Bomb”?
Authors: Pierre-Olivier Gourinchas, Ṣebnem Kalemli-Özcan, Veronika Penciakova, Nick Sander
From: University of California, Berkeley, Federal Reserve Bank of Atlanta, University of Maryland, Bank of Canada
The credit route to bankruptcy
Even though banks entered the Covid-19 crisis with notably higher levels of loss absorbing capital than during past crises, equity valuations appear to cast doubt on a swift recovery in banks’ franchise values (fourth panel). Pressure on banks to scale down lending and tighten funding conditions, particularly for the more risky borrowers, has thus increased and could impinge on firms’ ability to access bank credit. As lending support measures are eventually phased out, not least government loan guarantees, tight access to both bank credit and market-based funding could undermine firms’ ability to roll over their debts. At the same time, fear of further deteriorations in credit quality amid weak prospects for revenues could keep banks from writing off troubled loans and cleaning up their balance sheet, hampering the reallocation of funds to new borrowers.
Bankruptcies, unemployment and reallocation from Covid-19
Authors: Ryan Banerjee, Enisse Kharroubi and Ulf Lewrick
From: BIS
