The economy today

Economy: business failures are on the rise worldwide

Audio 03:41

The World Economic Forum has been held since May 22, 2022 in Davos, Switzerland.

AFP - FABRICE COFFRINI

By: Aabla Jounaïdi Follow

4 mins

While the richest bosses of this world are back at the Davos Forum in Switzerland, several recent studies point to the return of business failures on a global scale.

After two years of state support in the context of the health crisis, the disruptions linked to the war in Ukraine and the end of the accommodative policies of central banks are putting their cash flow under pressure: the Allianz Trade group estimates that the number of companies that can no longer repay their debts will increase this year.

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After two stable years, and even in 2021 a record low level for defaults observed, the leader in credit insurance estimates the increase at 10% for 2022. The trend is therefore starting to reverse.

Of course, this is due to the difficulties that are accumulating at the global level.

The invasion of Ukraine by Russia has aggravated the rise in prices, those of energy in particular.

As for disruptions affecting supply chains, shortages of inputs and labor, they continue to rage.

Now, the rise in the key rates of several central banks will inevitably worsen the conditions for refinancing these companies.

According to Allianz Trade, this announces the return this year of pre-crisis default levels for a third of the 44 countries examined in the study.

In Europe and the United States, companies massively supported by governments are doing well

As we saw during the health crisis, state support for businesses was not the same everywhere.

In these two regions, not only the number of companies on the verge of default has not exploded.

But listed companies have even been able to maintain a good level of liquidity, in particular by passing on cost increases to their selling price.

In China, public support for companies also manages to keep the level of defaults artificially low, even if the tightening of access to credit has capsized two real estate behemoths, Evergrande and Sunac, in six months.

But States' room for maneuver is beginning to shrink

In France, where we started to see an increase in insolvencies in the first quarter.

The newly formed government wanted to continue to support companies via partial unemployment schemes and state-guaranteed loans at least until the end of the year, in particular to preserve jobs and therefore purchasing power.

But this support will necessarily be reduced, more targeted.

The tightening of monetary policies in progress signals the end of whatever the cost, in other words the state's unfailing support for the economy.

And this is an even greater challenge for less developed states.

The IMF had already been alarmed by the situation of emerging countries such as South Africa, Brazil or Indonesia where support for the economy was not significant enough in 2020.

Many at the start of the Covid-19 crisis introduced moratoriums on debt to households and businesses.

While it is impossible to predict when the headwinds hovering over the global economy will end, the gap is likely to widen further with the developed countries.

Two World Bank economists warn of the risks of hidden corporate debt in these countries

In a recent column, Carmen Reinhart and Leora Klapper warn of the consequences of the end of economic support measures in low- and middle-income countries.

The debt moratoriums that have been granted have not always been accompanied by sufficient banking supervision.

As a result, we now discover mountains of debts that will probably not be honored.

The World Bank's "Pulse" survey of 24 low- and middle-income countries shows that already in January 2021, more than 40% of companies anticipated late payments within six months.

It is likely that this proportion has since increased.

The authors of the column call on States to establish more transparency in order to circumscribe the phenomenon as soon as possible and thus not threaten access to credit for households and businesses and therefore a possible economic recovery.

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