Governments around the world are scrambling to save companies battered by coronavirus lockdowns but the world is nevertheless facing a massive surge in bankruptcies by a third, a study conducted by a trade insurance firm said Monday.
“COVID-19 is creating an insolvency time bomb,” said the report by Euler Hermes, predicting a 35% cumulative jump in the number of companies that go bust between 2019 and 2021.
The firm — which provides insurance for trade deals — said this would be a record for its global insolvency index and that about half of the countries worldwide would be setting new highs since the 2009 financial crisis.
The biggest increase among the world’s economic powerhouses will be in the United States, with a 57% jump in insolvencies in 2021 compared to 2019, before the coronavirus struck.
On the other hand, bankruptcies are expected to soar 45% in Brazil, 43% in Britain, and 41% in Spain. China is forecast to see a 20% surge in bankruptcies.
In the US, “the rapid spread of the virus is amplifying the trough in activity and generating a liquidity crisis for a larger set of companies”, said the report.
“We do not expect the U-shaped recovery in the US to be sufficient to offset all the legacies of the crisis on financial metrics, nor to prevent the rise in insolvencies from continuing into 2021,” it added.
The insolvencies are disruptive as other firms are left unpaid or forced to scramble to find new, often more expensive suppliers.
“The larger the company filing for bankruptcy, the higher the risk of a domino effect,” said the report.
Euler Hermes also warned of two scenarios in which bankruptcies could jump even higher. A premature withdrawal of supportive economic and policy measures could push the rise in insolvencies to 40-45% .
“And if the global economic recovery takes longer than expected, the surge” in insolvencies could rise to as high as 85 to 95% , it added.