Global insolvency

The general manager, Agustin Carstens, of Bank for International Settlements (BIS) said and quotes “We have only just overcome the liquidity phase of the crisis in countries that are now relaxing restrictions. In many others, the health crisis is still acute. And the epidemic could flare up again anywhere. Importantly, the shock to solvency is still to be fully felt. Business insolvencies and personal hardship may well increase,” Acknowledging in late June whilst discussing the Bank’s 2020 Annual economic report.

Although in the recent months there has been a positive prospection in the global recovery from the virus. The announcements of vaccines have certainly raised hopes of a return to normal or the new normal at some stage. These news have positive implications on the economy in a longer run but as the saying goes ‘Old habits die hard’, there are few underlying weakness which are likely to remain for some more time. The alarming concern is the likely emergence of a solvency crisis, as the companies are about to file for bankruptcy since the liabilities swell to a place where they are unable to pay down their debts. To address the immediate liquidity constraints the banks took on a substantial amounts of debts. The largest 900 non- financial companies in the world was under the debt of $1 trillion been added to their year of 2020 to shore their finances up against the virus. The company borrowings around the world rose to record $8.3 trillion in 2019 which 8.1 per cent more than the previous year and it was the fastest annual increase in the previous five years. The records will now go even higher courtesy of the coronavirus , a 12 per cent rise was seen in 2020. The future will be all about conserving the capital and building a fortified balance sheet.

To sum up, the pandemic has left a number of businesses , entire industries like physical retails and travel sectors are struggling to survive , considerably raising the likelihood of a wave of bankruptcies sweeping across the world in the near future. A trade-credit-insurance and risk-management company, Atradius estimated that global corporate insolvencies would increase by 26 percent in 2020 as the major regions are expected to be vulnerable. Turkey, the United States, Hong Kong SAR, Portugal, the Netherlands and Spain are among the countries expected to experience the largest increases in insolvencies. In US, the recession might not be expected to be as deep as in the southern European countries. But the fluctuation of insolvencies are highly responsive in the economic activity. The effectiveness and the scale of the PPP ( Paycheck Protection Program ) are likely to remain lower than in the European countries, as they have provided with ample of liquidity assistance through wage subsidiaries. Although Germany, France, Austria, Belgium, Switzerland and Italy, insolvencies are likely to go up by percentages ranging from 6 percent to 20 percent. Many countries implemented laws which temporarily prevented insolvency proceedings which were declared as inadmissible in the courts. But everything depends on nature and the speed of the recovery during the coming months. A research report from RAND corporation states that there is a high risk of corporate default in the United states , the country responsible for almost half of the world’s corporate debt. That being said the report did not acknowledge that the credit market interventions may prevent the worst of the default risk scenarios from extending the credit access to firms.