Covid-19: business bankruptcies, the hardest part is yet to come

A shop permanently closed because of the Covid-19 health crisis in Paris. Illustrative photo. (JULIEN MATTIA / LE PICTORIUM / MAXPPP)

Despite the crisis, the number of bankruptcies is lower than in previous years. According to the Banque de France, between 2019 and 2020, there are even 30% fewer business failures. This is one of the paradoxes, while many companies are working in slow motion, in aeronautics, air transport, tourism and others are at a complete standstill, in culture, catering, etc.

The explanation: companies are on a drip, thanks to the panoply of government aid. This prevents those who, in normal times should be in legal proceedings or in liquidation, from sinking. Including those called “zombie companies”, that is to say whose economic model is not viable or which were too indebted before the crisis, regardless of the Covid-19. These measures are partial unemployment, the solidarity fund but also loans guaranteed by the State, PGEs. More than 600,000 companies have benefited for a total of 127 billion euros. These loans provide a temporary replacement for lost sales.

The risk is when these aids will decrease. When these emergency devices are going to be disconnected, it promises to be a disaster. According to the insurer Euler Hermès, the number of bankruptcies will reach 50,000 in 2021, or twice as many as last year and the shock will continue in the following years since he is betting on 60,000 bankruptcies in 2022. What will lead to job destruction, nearly 200,000 this year, according to the OFCE (the French Observatory of Economic Conjunctures).

The sectors most affected are those which remain closed the longest. Hospitality, leisure, tourism and aviation are at the forefront. The risk is that these cascading bankruptcies spread to other parts of the economy, hitherto rather preserved such as the financial sphere for example. It is to avoid this domino effect that the government is also trying to lengthen the repayment schedule for business loans or that it is considering not to stop the support measures too quickly.

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