Your daily briefing of some of the most important stories from the crypto, finance, and tech space.
Rising Insolvencies In Germany
German insolvencies rise as pandemic aid ends and economic challenges mount, impacting major companies.
German companies are bracing for an increase in insolvencies this year, a trend that began in 2023. This rise is driven by factors such as high energy costs, the end of pandemic aid, and economic stagnation. The shift is notable, with insolvencies expected to jump by 10% to 30%, surpassing pre-pandemic levels.
The End Of "Zombie" Companies
The generous government aid and suspension of bankruptcy obligations during the pandemic resulted in unusually low levels of insolvencies. However, many of these "zombie" companies are now collapsing. High-profile insolvencies include department store chain Galeria Karstadt Kaufhof and bag maker Bree. These developments are partly due to Germany’s economic stagnation, combined with high interest rates, rising wages, and elevated energy prices.
The Toll On German Businesses
The crisis is exemplified by the insolvency of Haba, an 85-year-old wooden toymaker. The company, facing rising energy and wood costs, filed for insolvency in December and plans to emerge in March after restructuring, which includes reducing its workforce by a third. Similarly, the German insurance association warns of a "massive increase in payment defaults", with credit insurers paying out over €1.2 billion in 2023: A 44% increase from 2022.
Broader Economic Impacts And Challenges
The German economy shrank by 0.4% in the third quarter compared with the previous year, and growth is only expected to reach 0.6% in 2024. This stagnation, coupled with budget cuts and the end of temporary VAT relief for restaurants, is exacerbating the situation. The restaurant sector alone faces a potential increase in insolvencies after already experiencing a 36.5% jump to 1,600 in 2023.
The rise in ECB interest rates is making it difficult for companies to find new investors, with only 52% of companies able to be saved through insolvency at the end of last year, down from 62% two years ago. The situation is particularly dire for start-ups, with almost 300 German start-ups, including Sono Motors, Social Chain, and Fraugster, filing for insolvency last year, a 65% increase from 2022. The challenges are not limited to startups; larger companies, especially in fashion retail, transport, real estate, and auto supply, are also facing difficulties.
Global Context And Future Outlook
The increase in insolvencies is a global phenomenon, with German insurer Allianz forecasting a 6% rise in global insolvency numbers last year and a 10% increase this year.
Germany, initially lagging behind other countries, is now catching up with this upward trend. While the current level of corporate distress does not yet match the severity of the 2008 financial crisis, the recent surge in bankruptcies signifies a significant shift in the economic landscape, moving beyond mere normalization but not yet reaching a tsunami-level crisis.
Maxime Lemerle, a lead adviser on insolvency research at Allianz, notes that Germany is aligning with other countries experiencing insolvency increases, such as France, the Nordic countries, and the Netherlands. The situation in Germany, reflective of broader global economic challenges, underscores the need for businesses and policymakers to adapt to the evolving economic environment, especially in the aftermath of the pandemic and amid ongoing global financial uncertainties.
Subscribe to our newsletter and follow us on X/Twitter.