Are almost a quarter of companies in the euro area on the verge of a serious liquidity shortage? Euler Hermes, the credit insurer, thinks so. Via a note posted earlier this week:
We expect a high cost for sectors sensitive to Covid-19 in the euro area, which could experience average operating losses of -15% to -20% in 2020 compared to pre-crisis levels. In the absence of prolonged fiscal policy support or an aversion to taking on more debt, this could drain liquidity reserves, putting around 24% of euro area firms (or more than 4.1 million ) in danger of cash flow crisis next year.
Here are the countries that will be the most affected:
So, are we about to see liquidity shortages trigger a wave of bankruptcies? Not necessarily.
If companies want to take on more debt, we would be pretty confident that banks or other lenders would provide it, simply because the European Central Bank has been – and, in our opinion, will continue to be – aggressive enough to meet more stringent credit conditions. The problem is, companies don’t seem to have drunk the Kool Aid of policymakers. According to the latest ECB survey on access to corporate finance, published earlier this week:
More euro area countries [smaller and medium sized enterprises] considered the general economic outlook as an obstacle to the availability of external financing (-41%, against -30%). This assessment was largely based on all countries, but was more clearly visible in the responses of SMEs in Austria (-57%, from -31%), Finland (-50%, from -44%) and in Portugal (-49%, from -29%). In addition, SMEs have indicated that they expect the availability of bank loans to deteriorate over the next six months (a net of -16%, down from -11%).
On the budget response, the credit insurer wants to see less paperwork in Germany regarding the Kurzarbeit scheme, under which up to 80 percent of the salaries of staff working fewer hours can be covered:
In Germany, Kurzarbeit has already been extended until the end of 2021 at a total cost of 40 billion euros. For most programs, no additional amounts will be announced as significant amounts remain untapped. However, bureaucratic arrangements and obstacles should be reviewed and adjusted to improve adoption. In particular, this involves relay support for businesses and emergency aid to very small businesses and independent traders, for which € 75 billion has been set aside but only € 15 billion used.
They also want the government here to extend the horizon for applying losses to future income, in order to reduce the tax burden on businesses. Although asking Germany to take it easy with bureaucracy seems a little pointless to us. Hmm.
In France, they would like to see more tax breaks:
A watershed moment for French companies could come in the second quarter of 2021, when the next production tax payments are due, combined with quarterly payments of other payment taxes, which could further widen the profitability gap with European peers. We estimate that the reduction in the production tax of 20 billion euros will bring only +1.5 pp of additional margins to French companies. Therefore, fiscal policy will have to do more to avoid a wave of layoffs and bankruptcies in France.
We know less about the likelihood, or not, of this. But we believe that more debt may still be the best bet for companies. The big question is whether, after such a disheartening year, they’ll be optimistic enough to bite, or if they’ll just give up and shut their doors.
The job market is much darker than the statistics show – FT Alphaville