Are almost a quarter of the euro area’s businesses on the brink of a serious cash crunch? Euler Hermes, the credit insurer, thinks so. Via a note published earlier this week:
We expect a heavy cost for Covid-19 sensitive sectors across the Eurozone, which could see 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 dry up cash buffers, putting around 24% of Eurozone companies (or more than 4.1 million) at risk of a cash-flow crisis next year.
Here are the countries that will be most affected:
So are we about to see cash crunches trigger a wave of bankruptcies? Not necessarily.
If companies want to take on more debt, then we’d be quite confident that banks or other backers would provide it, simply because the European Central Bank has been – and, in our view, will continue to be – pretty aggressive in responding to tighter credit conditions. The problem is companies don’t seem to have quite drunk policymakers’ Kool Aid. From the ECB’s latest poll of Access to Finance of Enterprises, which came out earlier this week:
A larger number of euro area [smaller and medium sized enterprises] saw the general economic outlook as an obstacle to the availability of external finance (-41%, from -30%). This assessment was broadly based across countries but was most clearly seen in the responses from SMEs in Austria (-57%, from -31%), Finland (-50%, from -44%) and Portugal (-49%, from -29%). In addition, SMEs indicated that they expected the availability of bank loans to deteriorate over the next six months (a net -16%, from -11%).
On the fiscal response, the credit insurer wants to see less red tape in Germany as regards the Kurzarbeit scheme , under which up to 80 per cent of wages for staff working shorter hours can be covered:
In Germany, Kurzarbeit has already been extended until end-2021 for a total cost of EUR40bn. For most programs, no additional amounts will be announced as large amounts remain untapped. However, the modalities and bureaucratic hurdles should be revisited and adjusted to improve take-up. This concerns in particular the corporate bridge support and the emergency aid for micro-businesses and sole traders, for which a combined EUR75bn have been set aside but only EUR15bn used.
They also want the government here to extend the horizon for applying losses to future revenues, in order to lower companies’ tax burden. Though asking Germany to go easy on bureaucracy sounds like a bit of a non-starter to us. Ahem.
In France, they’d like to see more tax relief:
A decisive moment for French companies might come in Q2 2021 when the next production tax payments are due, combined with the quarterly installments of other payment taxes, which could further widening the profitability gap with the European peers. We estimate that the EUR20bn production tax cut will bring only +1.5pp of additional margins to French companies. Hence, fiscal policy will need to do more to avoid a wave of layoffs and insolvencies in France.
We know less about the likelihood, or otherwise, of this. But our suspicion is that more debt might remain companies’ best bet. The big question is whether, after such a dispiriting year, they’ll be optimistic enough to bite, or whether they’ll just give up and go out of business.
Related links: The jobs market is far bleaker than the headline stats show - FT Alphaville