ECB: risk of a wave of insolvency of companies in the euro area

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April 28, 2021 "More than a year of restrictions on economic activity have not resulted in financial instability so far. However, the threat of a wave of insolvencies looms large, unless Member States manage a smooth transition from support to liquidity to

and effective corporate debt restructuring for

".

This is the key message of today's report by ESRB, the

linked to the European Central Bank, which examines the dangers to economic and financial stability of a potential large wave of insolvencies and the possibilities of mitigating these risks.

Non-financial corporations are under enormous financial strain as a result of the coronavirus crisis, the report emphasizes. So far, a swift and decisive response from policy makers has prevented a major wave of corporate insolvencies. However, the longer non-financial corporations have to rely on liquidity support measures such as debt moratoriums, loan guarantees and government loans, the greater their solvency problems could become as their debt builds up.

Since the outbreak of the first wave of Covid at the beginning of 2020, the massive and rapid response of the euro area states has consisted in alleviating the liquidity problems of companies, which arose suddenly due to the restrictions imposed by the health crisis. Debt moratoriums, loan guarantees and public loans were granted. However, the over-indebtedness resulting from these measures "increases the risk of a major wave of insolvency," warns the institution.

This trap could be avoided if states shifted from action to safeguard liquidity to "greater support for the solvency of profitable companies", that is, those deemed able to

. This new type of measure, which is equivalent to directly compensating for losses incurred, is more costly for public finances and should focus on the sectors most affected by the crisis (catering and accommodation, arts and entertainment, etc.), the report estimates.

It is also a question of avoiding "moral hazard" by ensuring that, alongside the States, the banking sector also bears part of the costs of supporting companies in difficulty but vital. On the contrary, states should not help

, whose profitability is jeopardized in the long term and whose survival depends only on the leniency of creditors or on public support, the dossier continues. Continuing to survive "zombie" businesses, already in trouble before the pandemic, could "significantly slow down the post-Covid-19 recovery", writes the ECB.