The Financial Times (FT) reported on the 15th (local time) that there are concerns that the number of companies going bankrupt in Germany this year could increase by as much as 30% compared to the previous year. It is a diagnosis that zombie companies, which used to survive with government subsidies during the COVID-19 pandemic, are no longer enduring the economic downturn and rising energy prices and are collapsing one by one.
The German Federal Statistical Office recently announced that the number of companies that filed for bankruptcy in the district court in January-October last year increased by more than 24% year-on-year. Jonas Eckhardt, who is in charge of consulting on restructuring at the independent consulting firm Falckenstik, predicted that the number of bankruptcies of German companies, whose annual sales exceed 10 million euros (about 14.5 billion won), will increase by more than 30% this year.
Thomas Langen of the German Insurance Association (GDV) suggested a 10 percent increase in the number of bankruptcies. According to GDV, German credit insurers paid 1.2 billion euros in insurance premiums last year, up 44 percent from the previous year. “The damage caused by bankruptcy and arrears is getting bigger,” Langen said.
Analysts say that as the economy rapidly slows down, companies feel more burdened to reflect soaring energy, labor, and raw material costs in product prices. Eckhardt said, “Companies are facing the question of ‘how much cost can they transfer to customers?'”
The shrinking room for financing as the high-interest rate environment continued for a long time was also a factor that fueled the “bankruptcy wave.” According to Falkenstik data, as of the end of last year, the percentage of companies that had the possibility of relief from insolvency stood at 52%, down from 62% two years ago. “Investors have become more risk-averse and are not actively taking action,” Eckhardt said. “Investors who are willing to take over insolvent companies still have to bear high financing costs.”
The tight financial environment was more fatal for startups. According to Startup Detector, a startup research firm, nearly 300 German startups filed for bankruptcy last year. This is a 65% increase from the previous year. Solar electric vehicle manufacturer Sono Motors, social commerce company Social Chain, and software company Frogster joined the ranks of bankruptcy.
Large companies were no exception. In recent months, famous companies such as Galleria Karstadt Kaufhof, German Chancellor Olaf Scholz’s favorite bag brand Bree, and 85-year-old wooden toy maker Haba went bankrupt. According to the Halle Institute for Economic Research, German companies’ bankruptcy rate started to exceed the pre-pandemic average last summer and hit a seven-year high in December.
“If you look at the report figures at the beginning of the year, the insolvency rate of companies will certainly rise further over the next two to three months,” said Stefan Müller, head of the Halle Economic Research Institute’s bankruptcy research department. “During the pandemic, the government poured subsidies into companies that were less productive, which only extended their lifespan.”
The German Ministry of Economy said that Germany’s current business environment is “challenging,” but reduced the problem, saying, “From a long-term perspective, corporate bankruptcy is not significantly higher than the pre-pandemic period.” Wolfgang Steiger, secretary-general of the Economic Committee of the opposition Christian Democratic Union (CDU), said, “Germany’s corporate insolvency rate is increasing at a faster rate than other countries, and this is due to the current government’s disastrous policy,” adding, “More and more companies are suffering from financial pain due to rising energy and labor prices and a shortage of skilled technicians.” Germany’s annual economic growth rate last year was -0.3%. The Organization for Economic Cooperation and Development (OECD) predicted that Germany’s economic growth would rebound to 0.6% this year, but this is a very sluggish performance compared to major advanced countries. Some institutions lowered their growth forecasts in the wake of the German coalition government’s recent decision to cut its budget. This is the aftermath of the German Constitutional Court’s decision to divert 60 billion euros (about 87 trillion won) allocated to respond to COVID-19 to the climate response fund, which is unconstitutional.
As part of its plan to reduce spending, the German government said it would raise the value-added tax rate in the restaurant sector, which was kept low at 7 percent during the pandemic, to 19 percent from this month. There are concerns that the move could close thousands of restaurants. Data provider Cliff estimated that more than 15,000 restaurants in Germany, including restaurants, snack bars and cafes, are currently difficult to do business normally, and 1,600 of them could go bankrupt this year.
“Germany’s bankruptcy rate was slower than France, Nordic countries, and the Netherlands, but it is catching up quickly,” said Maxim Lemaire, a bankruptcy researcher at German insurer Allianz Group. “It is not comparable to the level right after the 2008 global financial crisis. It is more of a normalization process than a tsunami.”
JULIE KIM
ASIA JOURNAL
