Economists at Natixis look at the situation of companies in the United States and the eurozone. Two trends are possible going forward: a sharp rise in bankruptcies due to the fall in activity and the increase in debt and the proliferation of zombie firms, due to the deterioration in balance sheets, but a limited number of bankruptcies thanks to public subsidies and very low interest rates. At present, the default rate remains low compared with what would be commensurate with the fall in GDP, which reflects the scale of the support received and leans towards the zombie scenario.
“There is reason to fear a significant rise in the number of bankruptcies (the default rate), given the fall in activity and the increase in corporate debt. The fall in revenues and the increase in debt could obviously lead to an increase in the number of bankruptcies.”
“It is important to not overlook the massive public support provided to companies: grants (France, Germany, Italy, Spain, Japan, United Kingdom), subsidised wage payments (all countries); direct tax cuts (all countries); reduction in social contributions (France, Italy, Spain); reductions in rent and electricity bills (France, Italy, Japan, United Kingdom); government loan guarantees (France, Germany, Italy, Japan, United Kingdom, Spain); direct loans to companies (France, Germany, Italy, Japan, United States, United Kingdom, Spain). This support has prevented earnings from falling and facilitated borrowing. Moreover, the very low interest rates are containing borrowing costs.”
“The proportion of zombie firms (defined as those with three consecutive years of higher debt service costs than earnings) in the United States has risen from 9% in 2000 to 12% in 2010 and 19% in 2020; in the United Kingdom it is 22% in 2020, compared with 2% in 1990 and 17% in 2010; in Germany, it has risen from 0% in 1990 to 10% in 2018; in France, from 4% in 1990 to 16% in 2018; in Italy, from 0% in 1990 to 15% in 2018; in Spain, from 6% in 1990 to 13% in 2010 and 2018; and in Japan from 0% in 1990 to 3% in 2018. For the OECD as a whole, it rose from 5% in 1990 to 15% in 2018. Available studies show that zombie firms have lower productivity, have more debt and invest less in productive capital and in innovation than other companies. The growing number of zombie firms may explain the low level of investment and the decline in productivity gains.”
“At present, the default rate has not risen much relative to the magnitude of the fall in GDP. Had the link between growth and the High Yield default rate remained the same as in the past, the High Yield default rate would be 20% (not 9%) in 2020 in the United States and 26% (not 4%) in the eurozone.”
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