Surge In Corporate Bankruptcies Amid Economic Shifts

Global corporate bankruptcies surge as high interest rates and reduced COVID-19 aid impact businesses.

Why are global corporate bankruptcies increasing?

Recent months have seen a significant rise in corporate bankruptcies across advanced economies, driven by higher borrowing costs and the withdrawal of COVID-19 aid, marking a sharp reversal from the previous decade's trends.

Escalating Bankruptcy Rates Worldwide

Data from various national courts and statistical offices reveal a worrying trend in corporate bankruptcies. In the US, there has been a 30% increase in corporate bankruptcies over the past year, as reported by court data. Similarly, Germany witnessed a 25% rise from January to September compared to the same period last year.

US Bankruptcies Flash Red Warning
A high level of bankruptcies may not be the signal of devastation it first appears to be.

Across the European Union, corporate insolvencies surged by 13% in the first nine months of the year, reaching an eight-year high, according to Eurostat. Analysts attribute this rise to increased interest rates, the collapse of "zombie" companies reliant on government support during the pandemic, and high energy costs, particularly in sectors like transportation and hospitality.

Table of bankruptcy fillings 2023 in Europe
Bankruptcy fillings in Europe (Source: Eurostat)

Transition From Pandemic-Era Support

During the pandemic, governments globally injected over $10 trillion into economies to support businesses and households, as estimated by the IMF for 2020 and early 2021. However, these support mechanisms have largely been phased out, leaving businesses, especially those that need to refinance debt at higher rates, vulnerable. The expected continuation of this trend could impact global economic activity and job growth in the coming years.

Future Outlook And Sector-Specific Impacts

Moody's anticipates the global speculative-grade default rate to rise in 2024, surpassing the historical average. Industries such as hospitality, transportation, and retail have already felt the impact, with real estate and construction expected to face challenges due to sensitivity to interest rate increases. Despite this, various analysts suggest that the peak in insolvencies might not reach the heights of previous downturns due to energy subsidies and other measures, along with businesses having accrued cash reserves and secured low-rate financing deals. The current bankruptcy numbers, while rising, are still considered modest by historical standards in major economies like the US, Germany, and France.

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