A leaked document from the European Union has revealed that a spike in bankruptcies and bad loans awaits the European Commission during the bloc’s post-pandemic economic recovery, as states begin to withdraw public support schemes.
The note, seen by Reuters, said that it has taken nearly €2.3 trillion in national liquidity support to prevent a sharp rise in insolvencies.
Without the state aid, almost a quarter of EU companies would have suffered liquidity issues by the end of 2020 as financial buffers dwindled.
Initially prepared for a euro zone finance ministers’ meeting on Monday, the document revealed that a near half of all firms that were spared liquidity concerns last year, were already at high risk.
Now being kept afloat by government aid, the firms are unlikely to survive after the withdrawal of support schemes.
“Once the unprecedented public support measures expire, a number of businesses are likely to default on their debt obligations, leading to higher non-performing loans and insolvencies,” the note said.
Hotels and restaurants have been worst impacted, with three quarters experiencing liquidity problems, followed by the automotive, basic metals and textile industries.
Communication services, food, pharmaceuticals and electronics fared much better in comparison.
One senior euro zone official involved in the Monday talks backed fiscal support being maintained, however, urging that support “may need to change shape” for it to be viable for the Commission.
The document said that 32 per cent of EU government liquidity measures, sitting at €2.3 trillion, has gone to firms and households – primarily public support.
The note also revealed that euro zone bank loans under moratoria totalled €587bn in the third quarter of 2020, with 60 per cent being corporate loans.
“Overall, the volume of non-performing loans is expected to rise across the EU, although the timing and magnitude of this increase remains uncertain,” the Commission said.
The talks on Monday are set to focus on managing the future transitional period for businesses as they move away from state support.
The note revealed that bank borrowing surged in France, Italy and Spain – reversing a decade of decline in corporate debt to banks.
However, the Commission will look to the private sector for help, with banks in a stronger capital position compared to the 2008 financial crash.
“While it is clear that the debt-servicing capacity of the private sector has been adversely affected by the pandemic, government credit guarantees and loan repayment moratoria have so far prevented a rise in loan defaults,” the note said.