Phasing out of aid packages and the normalization of the bankruptcy legislation expected to cause significant deterioration in global insolvency outlook this year.
Despite the deep recession caused by the COVID-19 pandemic last year, the expected spike in global bankruptcies did not occur. Globally the number of bankruptcies fell by an estimated 14% in 2020 with some of the larger European economies: Spain, Germany, France and the United Kingdom, experiencing declines of 14%, 17%, 40% and 27%. In the Netherlands, bankruptcies decreased by 17% in 2020, compared to the already low level in 2019.
Turkey and Ireland were the only two countries examined where bankruptcies increased last year. In Turkey, companies faced tighter financing conditions and limited government support. In Ireland, the increase was only 1%.
Two factors can explain the striking trend of declining bankruptcies. Firstly, many countries made changes to their insolvency regime in order to protect companies from going bankrupt. Secondly, governments across the world have taken fiscal measures to counteract the adverse economic effects of the pandemic and support small businesses, in particular.
Increase in bankruptcies expected in all major regions worldwide
Despite the rollout of vaccines and positive growth figures, we expect a 26% increase in bankruptcies at global level in 2021. An increase is expected in all major regions and countries reviewed, except for Turkey, where bankruptcies were already on the rise in 2020. The largest increases are expected in Australia, France and Singapore.
These forecasts are mainly based on expectations of gradual phasing out of local fiscal support measures and reopening of bankruptcy courts and proceedings. Consequently, many companies that were rescued last year by the above mentioned measures, will likely file for bankruptcy in 2021. It is worth mentioning that the countries with the highest expected increase in insolvencies in percentage terms this year are most likely the ones with unusually low insolvencies in 2020.
ERD insolvency report matrix March 2021
Bankruptcy levels expected to remain high at the end of 2021
Bankruptcy levels in almost all countries examined - except for Germany, Greece, New Zealand and Romania – are expected to be higher at the end of 2021 than before the outbreak of the COVID-19 pandemic. Spain and the Netherlands are among the countries forecast to experience the largest increase in bankruptcies, taking together the forecast of 2020 and 2021. This is due to a relatively strong reaction of bankruptcies to GDP fluctuations traditionally observed in these countries.
Three forces are expected to shape global insolvencies development in 2021: the strength and breadth of economic growth this year, the gradual phasing out of government stimulus and other support schemes, and whether temporary changes in bankruptcy legislation reduced or just delayed filings. Their combined impact will greatly influence actual insolvency numbers and trade credit risk in 2021 and 2022.