German Economic Crisis Response Could Have Sting in the Tail

Germany extended another crisis tool to prevent corporate bankruptcies, a move that critics say will store up bigger problems later for Europe’s largest economy.

The longer suspension on insolvency filings has raised alarm bells that it’s masking a growing credit risk that could explode into a wave of bankruptcies when the moratorium ends. It may also be creating a cohort of zombie companies that hold back investment and innovation and act as a drain on the economy.

German Economic Crisis Response Could Have Sting in the Tail

“It was an appropriate measure during the acute phase of the coronavirus crisis,” said Ulrich Keil, founder of insolvency register Insolvex. “But the risk is big that an extension will create zombie firms.”

The insolvency waiver will now stay in place until the of the year, while Germany’s enhanced Kurzarbeit job scheme will run through 2021.

Across Europe, such support has saved companies and jobs -- Germany’s Ifo institute predicts an imminent pickup in the labor market. But now countries are grappling with how to balance that protection against allowing economies to restructure.

Aid is making it easier for unviable businesses to survive, delaying much-needed change to keep the economy globally competitive. It may also erode the chances for currently insolvent firms that still have a place in today’s corporate world.

While the Association of German Chambers of Industry and Commerce, or DIHK, welcomed the insolvency decision, it also said “concerns are building that protracted insolvencies are triggering dangerous chain reactions.”

In Germany’s case, some problems go beyond the cyclical. Even before the pandemic, many companies were struggling with more profound shifts, particularly in the crucial car industry.

“Governments now have to strike a difficult balance,” said Paul Donovan, global chief economist at UBS Wealth Management. “In the long term, it is economically efficient to preserve jobs in companies with a future. It is economically inefficient to preserve jobs in companies that are unlikely to survive the structural changes of the fourth industrial revolution.”

Along with loan and credit guarantees, tax-payment delays and wage support, Germany’s insolvency waiver helped cash-strapped firms get through the past few months. One in five companies sees itself at risk of failure due to the pandemic, according to a recent Ifo survey.

Debtor registration firm Creditreform predicted in mid-August that insolvencies would increase about 20% this year, more than during the 2008 financial crisis, though an extension of the waiver could lower that estimate.

German Economic Crisis Response Could Have Sting in the Tail

Prolonging the life of weakened firms can also have repercussions on payments across the business chain. Suppliers, particularly in the chemical and basic-goods industries, saw longer delays in settling bills in the first half of the year.

In response to questions by Bloomberg, Germany’s justice ministry brushed off concerns about payment delays, saying the moratorium differentiates between insolvent and over-indebted companies.

There’s a political element to any decision, with an election due in 2021. The health of the economy, businesses and employment will all play large in the campaign.

“Insolvencies can quickly trigger crises of confidence,” said Christoph Niering, who heads Germany’s Registered Association of Insolvency Administrators, or VID. “If a big number accumulates and is released all at once, it can erode sentiment, particularly if bigger companies are involved and suppliers become affected as well.”

©2020 Bloomberg L.P.

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