Insolvencies on the Rise Worldwide Zombie Deaths Expected in China

The end of fat years and easy money: export risks will increase significantly in 2019. Globally, the credit insurer Euler Hermes expects around 6% more insolvencies in 2019 than in the previous year.

This is the conclusion reached by the Allianz subsidiary in its latest insolvency study.  After an already massive increase of bankruptcies around 60 % last year, economists expect a further wave of bankruptcies to hit China with an increase of another 20 % in 2019.For years, in China, state and regional governments have artificially kept companies afloat as so-called zombie companies with loans almost free of charge. The focus of the Chinese government has shifted in recent years. It has set itself the goal of targeted structural change and wants to move away from the image of a low-cost production country towards an economy dominated by the service sector.

This means that many industries that were promoted in the past are no longer in the strategic focus of the state and the government is no longer afraid to let them go bankrupt. "Zombie dying is in full swing in China," emphasizes Ron van het Hof, CEO of Euler Hermes in Germany, Austria, and Switzerland. He refers to China's bankruptcy figures: While the increase in insolvencies was 11 % 2016, it was an additional 74 % in 2017 and probably 60 % more in 2018. According to Ron van het Hof, this trend will also continue in 2019 with an expected 20% increase in bankruptcies.

Zombie Companies also in Germany

According to van het Hof, there are also surprisingly many unprofitable "zombie companies" in Germany. "Although the occurrence is absolutely not comparable with China, seemingly dead companies are not only an export risk, but also a problem for suppliers in Germany, which they should keep a better eye on," explains the CEO in his blog. The reason is cheap money. The low interest rate environment means that zombies do not disappear from the market. This is how they save themselves, tie up capital and manpower - and bundle risks. "Under "normal" conditions they would probably have disappeared from the market by now. The question, however, is: how much longer they can exist if interest rates pick up again and economic growth loses momentum," continues van het Hof.

However, with the 2019 case numbers stagnating, Germany continues to buck the insolvency trend, together with the USA and the Netherlands, both of which are expected to record the same number of cases in 2019. Brazil (-6 %), Greece (-6 %), the Czech Republic (-10 %), and Hungary (-11 %) are also among the "best in class". Colombia (-10%), Portugal, Ireland, and Lithuania (all -5%) also recorded declining case numbers. However, the number of bankruptcies in these countries remains at a historically very high level.

"Although Germany and the Netherlands are doing well in Europe, the trend is slowly reversing here as well," said van het Hof. "After years of declining case numbers, the bankruptcies are stagnating for the first time. However, the average losses from insolvencies have already doubled in recent years. Moreover, German companies are especially affected by the rising number of bankruptcies worldwide due to their strong export orientation. In the event of renewed tensions and trade conflicts, they are also among the biggest losers, especially in the automotive industry. A large proportion of German exports go to other European countries - but credit risks are also on the rise among supposedly safe neighbors, especially in the UK.

In Western Europe as a whole, insolvencies are expected to rise by 3 % in 2019. The main driver remains the UK in the wake of Brexit uncertainties. However, France, Spain, and Italy are also recording rising bankruptcies in 2019. "Worldwide insolvencies will rise for the third time in a row in 2019," says Ludovic Subran, Chief Economist at Euler Hermes and Deputy Chief Economist at Allianz. "This year even in two out of three countries. That shows: The fat years are over and the global economy is weakening. Many countries are growing more slowly than they need to in order to keep their insolvencies stable. In Western Europe, it has been shown in the past that this threshold lies, for example, at a GDP growth rate of around 1.7%." Growth and demand in many countries and companies are therefore no longer sufficient to cover production, (re-)financing costs, or investments in the course of structural change. "Other reasons include the end of easy money, historically high corporate indebtedness, new insolvency rules or, as in China, a much greater willingness to apply insolvency procedures," says Subran. "In addition, there is an added fraction of insolvencies in those countries where the number of start-ups has risen sharply in recent years. Many of these young companies don't make it."