Germany Extends $37 Billion Backstop for Credit Insurers

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Germany agreed to extend a backstop for commercial credit insurers by six months to keep trade flowing and prevent bankruptcies as the economy is hit by a second wave of the coronavirus pandemic.

Under the deal, which still requires a sign-off by the European Commission, the government will guarantee losses of up to 30 billion euros ($36.5 billion) through the end of June, according to a statement by the finance and economy ministries on Friday. In return, insurers will surrender just under 60% of their premiums for the period to the government. The industry also agreed to maintain most of its coverage.

The backstop, first agreed in April, is part of an unprecedented package of stimulus and relief measures aimed at containing the damage from widespread economic lockdowns. The extension comes as Germany is bracing for a surge in insolvencies after a moratorium to help companies survive the coronavirus outbreak came to an end, while the country is still engulfed in a second wave of the pandemic.

Credit insurers offer cover for businesses in case customers pay bills late or default. Without a backstop, insurers could become increasingly reluctant to maintain their coverage, which in turn could send ripple-effects through the economy.

The backstop is “one of the most important cornerstones for a rapid further stabilization of the local economy and businesses”, said Ron van het Hof, who heads the German unit of credit insurer Euler Hermes Group, which is part of Allianz SE.

Earlier this year, Euler Hermes had warned of a global “insolvency time bomb”. The Covid-19 crisis will trigger a major acceleration in insolvencies due to the suddenness and historic size of the economic shock and its expected lasting effects, it said. Coface SA, another major credit insurer, also sounded the alarm.

Shares of Allianz declined 0.2% at 9:12 a.m. in Frankfurt, while Coface rose 0.4% in Paris trading. Both stocks are down this year as the pandemic weighs on earnings, with Allianz losing about 9% and Coface 21%.

©2020 Bloomberg L.P.

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