Firmeninsolvenzen

Leitartikel

Where are we going?

28.06.2010

‘Where are we going?’ was the name of the first public exposition – held at Venice’s Palazzo Grassi – by the Pinault foundation of contemporary art. It’s name was inspired by Damien Hirst’s 2004 work entitled. Where Are We Going? Where Do We Come From? Is There a Reason?

The existential question asked by Hirst could also be posed by the euro zone – that ideal monetary union, which, for some weeks now has been experiencing the severest crisis in its short history – a crisis that has raised tensions across the majority of financial markets. This is just as much a political crisis as an economic one, with unilateral declarations by some members of government prevailing over the coordinated statements by heads of state.

It is also a crisis of nerve – one in which the threat of even one single member state abandoning the euro throws doubt over the solidity of the entire edifice. And it is perhaps even an historical crisis, given that – despite official denials – it seems that some governments – founding members of the euro – may for the first time be considering the possibility of taking a step backwards –a first such move in the long process of European integration that began in 1950 with the European Coal and Steel Community. What is happening? It all looks to have started with Greece.Or so it seems. Several years of lying about the real state of its public finances, a particularly unbalanced productive structure(essentially based on agriculture, construction and tourism), and a few disgraceful populist exchanges between the Greek and German presses seem to have globally raised investor anxieties over the possibility of sovereign default by a euro zone member state.

Despite an (admittedly tardy) EU announcement of an aid package for this small nation at the start of May, and then especially the IMF and EU announcement of a USD 750bn emergency support package for the euro (agreed on the night of 9-10May), by the end of the month the markets’ nerves remained jittery. The reason: Greece is not the problem. Anyway, how could such a small economy threaten the existence of the gigantic euro zone? What really worries the world’s investors is the euro zone’s risk of divorce by mutual consent. The agreement between France and Germany to create the euro zone nearly 20 years ago was almost mad: to create a joint currency – an unheard of national gamble, and a strong political statement. But this would be under two conditions: first that there would never be any inflation (the condition demanded by Germany, which had paid dearly for the privilege of knowing what it was talking about), and. second, that there would never be any savage trade wars (demanded by France). In a certain fashion, since the start of millennium, each partner has failed to respect the other’s wishes.

For its part, France refused to take seriously the Maastricht Treaty (manipulated and reviled by the highest figures in government) and the independence of the European Central Bank, which both countries had adopted to prevent countries from unfairly using the
shelter of monetary union to increase their deficits unsustainably, which would undermine levels of confidence in the euro on the part of economic agents.

Germany, for its part, opted to base itsmacroeconomic growth on price competitiveness, grabbing market share from France – its main trading partner – in the very heart of the euro zone. As is often the case in any crisis involving old married couples, there are rights and wrongs on both sides. Even so, mutual irritations, revisited grudges and continued latent prejudices end up becoming dangerous. The longer they persist, the more the rest of the world will be right to ask where we Europeans are heading. Our responsibility is to put an end to this questioning without delay. To paraphrase Helmut Kohl, we need to reaffirm that we wish for neither a French Europe, nor a German Europe: we want a European France and Germany.

Karine Berger

Source: Euler Hermes Economic Outlook, Summer 2010

Neither better or worse

16.12.2009

Two records in a row: +26% in 2008 and +33% in 2009. These are figures for the increase in business insolvencies across the world, and they are unprecedented. There are many factors to explain these business failures, and one may broadly divide these in to two main categories –one that that we can label as ‘economic’ factors and the the other as ‘financial’ factors. The economic factors include, in particular, a shortage of market outlets, strategic errors, excessive costs, and macroeconomic rigidities specific to a given country or sector. The financial factors that can equally be at the root of bankruptcies include insufficient self financing, difficulties obtaining payment from customers, and financial costs
resulting from excessive debt.

We can already draw some ready conclusions about the chain of events at work in 2008 and 2009. Firstly, unlike in previous crises, the financial factor seems to have been an essential element driving the explosion in business insolvencies in 2008; the financial constraints suffered by businesses from summer 2008 probably were at the root of half the increase in insolvencies seen across the world. But, in this, there were marked differences from country to country. The problem was very acute in countries where businesses bore a heavy component of debt in their liabilities, and it was precisely in those countries that the financial crisis caused by over indebtedness was most violent. Such was the case in the United States, the United Kingdom, Spain and undoubtedly several countries in Eastern Europe. On the other hand, in countries such as Germany or France, the financial constraints contributed only slightly to the rise insolvencies; either because inthe endt hese constraints proved rather weak (Germany),or because businesses resorted to other means of financing, such as business-to-business credit (France).

In 2009, the picture was different: nearly all the rise in insolvencies arose from the economic shock, that is, from a collapse in business turnover, the root cause of the descent in business profitability. In normal circumstances, business profitability is the main factor in insolvency. As a result of the crisis, in all countries, the abrupt contraction in markets has halted economic flows, thoroughly compromising the economic equilibrium of businesses and thus their profitability.

In such an environment, the outlook for 2010 is at the very least a gloomy one. The wheezy revival in economies that we are anticipating will not be sufficient to compensate for the fall in profits suffered. The blocking up of domestic demand will rule out any tangible exit from the crisis before the end of 2010. Put another way, businesses are facing around ten months of very low turnover – too low to solidly restore their profitability. Moreover, all this will come with many of them having already depleted their cash reserves over quarter upon quarter of economic turbulence. The out come will be that 2010 will be a year of transition. Overall, there should be no new increase in global insolvency next year, but nor should there be any reduction, notwithstanding some differences from country to country.

We do not expect any further skidding out of control, but nor do we see any durable easing in the global situation. No spectacular upturn, no double-dip recession. No miraculous reabsorbing of the gigantic accumulated debt, nor –we pray – any new surge in indebtedness. In this very precariously balanced situation, the budget policy choices facing governments, the monetary policy choices facing central banks, and the growth model choices facing business management are, to say the least, perilous.

Karine Berger

Source: Insolvencies outlook. Winter 2009-2010

Sacrificial slaughter

This spring, the peak of the extraordinary crisis that the world economy is traversing may be behind us. However, we recognise from the outset that there is little cause to rejoice. For, down the road from that summit, stretching out ahead are long months of gloom, uncertainty and risk. Admittedly, we do not expect a repetition of the enormous 2.5% collapse in OECD GDP seen in the first quarter of this year: industrial destocking has occurred on a massive enough scale to suggest a stabilisation in output this summer in several sectors. Even so, world activity will continue to fall, and for certain sectors that are a bit to the rear of the train, such as capital goods, the contraction will probably even accelerate in these months. In truth, it seems increasingly difficult to use the word ‘recovery’ to describe the stabilisation we expect in 2010.

In this environment, we must witness a massive sacrifice of businesses everywhere across the globe, at least up to the end of 2009. And this is because, for numbers of businesses that have drawn heavily on available cash in order to outlast the shock of the last three quarters, it only needs a few more months of empty order books or failing sales to send themon their way to insolvency. And, on this point,we have seen a genuine change at work in recent months: whereas, in our last survey of global insolvencies, in autumn 2008, we could state that the two major sectors hit by the shock were finance and construction, today we now see the main part of business insolvencies in industrial sectors: automaking (Chrysler), chemicals (Lyondell in the United States), intermediate goods (Qimonda AG in Germany), and telecommunications (Nortel in Canada). Retailing, wholesaling and transport are also feeling the full brunt of the crisis. Alongside this, the average turnover per business insolvency has risen greatly.

In sum, the final balance of business insolvencies for 2008 proved even worse than we had anticipated, with the number of cases shooting up by 27% worldwide, by a third in Europe and by half in the United States. And in addition to this, and above all, the economic tides of 2009 will, practically everywhere on the planet, take the number of insolvencies to levels seen never before. We expect our Global Insolvency Index to rise by 35%. Certain countries, such as Spain, the United Kingdom, Ireland, the United States, and the Baltic countries as well, should see insolvencies rise for the second consecutive year by more than 40%. As for next year, there is little likelihood that the levels of business insolvencies will abate: they may stop rising, but the very lightwinds of recovery we anticipate will not save many more businesses in 2010 than they will in 2009. The economic gods will remain hungry for sacrifice for quite some time.

Karine Berger

Source: Insolvencies outlook. Summer 2009

Global and sectoral resonances

For the first time in thirty years, an economic crisis has struck simultaneously on both sides of the Atlantic. While, since 1973, there was never a slowdown in Europe that was not associated with deceleration in the US economy, during these slumps, slowdown or recession in the United States always preceded that in the European economies by around four to six quarters. This is not the case in
2008: the contraction in GDP has occurred practically at the same time: in spring / summer in the US, in the UK and inmost of the countries in the euro zone.

What can we conclude from this? We can offer at least an observation on the causes of the current crisis and one of its consequences. The observation on the causes relates to the important role played by globalisation in triggering the present crisis: the unprecedented extent to which markets in both goods and finance have been globalised – far greater than ever before – is the genuinely new feature of the present crisis. Globalisation has acted, of course, in leveraging the fast and simultaneous diffusion of the crisis (in securitised subprime mortgages). But it has also acted in detonating the crisis, via the surge in commodity prices that itself directly results from the globalisation of trade and the economic growth thus generated. One consequence can also be identified

From the simultaneous nature of the present crisis in the OECD countries: the crisis has started ‘resonating’ – in the sense of the term in wave mechanics, in which, e.g., a bridge can start resonating when the steps of those walking on it occur at a given frequency. In other words, what we are seeing in this winter of 2008-2009 is a formidable amplification of the crisis that is taking place, and the amplification is a result of the simultaneous occurrence of these shocks. Notably, we see the non-OECD economies also suffering from a parallel closing in all their markets, causing a chain of insolvencies in their export-led sectors, even in economies as dynamic as China’s. This state of resonance may explain why the increase in insolvencies, with the average global figure expected to rise by 25% in both 2008 and 2009, is hitting identical sectors in very distant countries, even though not all of these sectors are involved in world trade. The first two sectors to have suffered a surge in insolvencies in many countries were real estate and finance: of the ten biggest failures recorded in the US in 2008, five were in the financial sector and three in real estate, while in Japan, four were in finance and five in real estate. While globalisation directly explains the spread of the crisis in the financial sector, its spread through real estate sectors is harder to explain, if not by some particular resonance of the crisis. Thus, in Germany and France, alongside industry, the sectors with the biggest number of insolvencies in 2008 have been those dependent on consumption – in particular, retailing.

Lastly, in the United Kingdom, undoubtedly the economy most destabilised by the present crisis, we are witnessing the conjunction of insolvencies in all these sectors at once. In order to deal with the crisis of 2008, it is thus essential to appreciate its global and simultaneous character, and to understand that this aspect of the crisis is a necessary and sufficient reason for the government stimulus plans now under consideration to equally assume their own global and simultaneous character.

Karine Berger

Source: Insolvencies outlook. Winter 2008

Globalization put to the test

The process known as globalisation is now undergoing its first genuine test, and perhaps even its first crisis. We are no longer in the same world that we knew seven years ago, at the time of the last slowdown in the American economy : the phenomenal expansion in economic exchanges, the even more disproportionate increase in financial trading, the rise of the euro and the arrival of China and India on the world scene are so many factors reshuffling the cards of the normal crisis mechanisms.

Because of this, attempting a comparison between the current economic slowdown and those that went before will not work. In the so-called ‘globalised’ economy, the shocks we are experiencing are bound to be of a new kind. Why has everyone’s attention been focused for several months on the financial crisis, on the manner of its spread and the suitable monetary policy responses ? The answer, of course, is because of the suddenness and scale of the subprime crisis, and of the systemic risk that it has engendered; but, undoubtedly, it is also because the fact of seeing local governments in Scandinavia being hit by a property bubble thanks to globalised securitisation mechanisms gives us first hand experience of what globalisation means today, and the singular difficulty of mounting a suitable response to a shock capable of instantaneous worldwide repercussions.

Our study of the growth in business insolvencies across the world in2007 and early 2008 is further proof of this phenomenon: the real-economy problems have immediately gripped real-economy businesses across the entire globe. The rapid spread of the economic slowdown to most economies is demonstrated by our Global Insolvency Index (GII), which shows a 6% increase in insolvencies last year, a trend that we expect to accentuate to a 15% increase in 2008. The trend change in the US last year was abrupt, with a 44% rise in insolvencies, and we expect the number of cases to grow by a further 35% this year; those sectors directly or indirectly involved in the real estate market and real estate lending are, of course, on the front line. What is even more astonishing is the nearly simultaneous rise in insolvencies fairly everywhere across the world : a synchronous increase in Spain (an expected +90% in 2008) or in Ireland (+39% in 2008) or, with a slight delay) in the UK, in France, or in Italy (an expected+ 10% in 2008). All these countries, hit more or less sharply by collapse in their real estate sectors, find themselves jointly weakened by the rise in insolvencies.

So far, only the German economy has escaped this development, but this does not mean that it will be protected against it in the second half of 2008: the darkening situation in all of its trading partners should rapidly stem its external surplus, the sole driver of German growth. On top of the financial crisis and the global economic slowdown, there is a third test that globalisation faces, namely, the oil shock that has been unleashed since 2005 and of which we are barely beginning to get the true measure. The gains in wealth and growth from globalisation, up to then brought about by competition in production and thus the deflation that this has brought about, are undoubtedly at the very root of the current oil shock –which is precisely what is relaunching global inflation.

The year 2008 will tell us if, in undergoing this three-fold test, globalisation acts as a beneficial shock absorber or, to the contrary, constitutes an uncontrolled amplifier of major economic shocks.

Karine Berger

Source: Euler Hermes Insolvencies Outlook, June 2008