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Exclusive: EU faces bankruptcies and bad debts as COVID-19 aid for businesses ends

By Jan Strupczewski

BRUSSELS (Reuters) – The European Union faces an increase in bankruptcies and bad debts once the post-pandemic economic recovery begins to take hold and governments begin to withdraw public programs that keep many companies under respiratory assistance, says an EU document.

The European Commission note, prepared for talks with euro area finance ministers on Monday, says that thanks to nearly 2.3 trillion euros ($ 2.8 trillion) in domestic liquidity support measures , eurozone governments have so far avoided an increase in bankruptcies.

Without such aid and new bank loans, nearly a quarter of businesses in the EU would have had liquidity problems by the end of 2020 after exhausting their cash reserves due to the economic devastation caused by the pandemic. of COVID-19, according to the memo.

“Once the unprecedented public support measures expire, a number of companies are likely to default on their debts, which will lead to an increase in non-performing loans and insolvencies,” said the note, seen by Reuters.

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Almost half of all businesses that reportedly had cash flow problems last year due to the pandemic were already at high risk of default before the crisis and were now kept afloat only with aid of the government. They were therefore likely to face solvency issues after the crisis, according to the note.

Monday’s ministerial talks will focus on how to manage the process of weaning businesses from state support in the future and how best to identify, with the help of private sector investors, which businesses are viable and can survive.

“MORE TARGETED SUPPORT”

“It is fully agreed that budget support must be maintained for now, for a good while,” said a senior euro area official involved in the preparations for the talks.

“But it is also recognized that the support may have to change shape, that there will have to be a gradual transition to more targeted support.”

The note says that in the third quarter of 2020, euro area bank loans under moratorium amounted to € 587 billion, of which around 60% were business loans. In the second quarter, the share of euro area bad debts in total loans was 5.23%.

“Overall, the volume of non-performing loans is expected to increase across the EU, although the timing and magnitude of this increase remains uncertain,” the Commission said.

Fortunately, the stronger capital position of banks compared to the financial crisis a decade ago should help them absorb the shock better this time around, the Commission said.

The most affected have been hotels and restaurants, three quarters of which have liquidity problems, but also transport, automakers, base metals and textiles. Communications services, food and pharmaceuticals, and computers and electronics fared much better.

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BAD LOAN RATIOS

Corporate liquidity problems are not yet reflected in bad debt ratios.

“While it is clear that the private sector’s debt service capacity has been affected by the pandemic, government credit guarantees and loan repayment moratoria have so far prevented an increase in defaults. “, says the note.

“So the NPL (non-performing loan) ratios – based on a rather stable stock of NPL and the increase in the loan denominator – do not yet reflect the underlying deterioration in the credit profile of borrowers,” said the Commission.

Of the nearly € 2.3 trillion in government liquidity measures at EU level, businesses and households have absorbed some 32% of the total, mostly in the form of government guarantees, the note said.

To continue despite the lockdowns, companies have depleted their cash reserves and borrowed money while using government aid. Bank loans increased the most in France, Italy and Spain, reversing 10 years of falling corporate debt to banks, according to the note.

Ministers will now have to figure out how to keep credit channels open to viable businesses; surveys indicated that credit needs already exceeded availability in all euro area countries.

The Commission said that although euro area banks were generally strong at the start of the crisis, they now believe that risks to businesses and the economy as a whole have increased.

“According to the ECB’s bank lending survey, banks expect to further tighten credit conditions and increase collateral requirements,” the Commission said.

($ 1 = 0.8251 euros)

(Reporting by Jan Strupczewski; Editing by Kevin Liffey)

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